Let’s call a spade a spade here: we all started our businesses to make money.
I hear people all the time say “if you’re in it for the money, you’re in it for the wrong reason.” That’s rubbish. You started your company to make money. Otherwise you’d be running a non-profit.
I don’t know when ‘money’ became a dirty word, but I want you to know that making money – and paying yourself – is GREAT!
Passion comes into it, of course. If you’re not passionate about the business you run, you’ll struggle to find joy in it and you’re likely to burnout.
My passion is pulling back the curtain on Small Business Finances, because I wish I had someone to do this for me when I was starting out running restaurants.
But I don’t do it for free – I started the company to make money, regardless of how much I also want to help fellow entrepreneurs.
So, how do we make money in our businesses? We pay ourselves!
Staying compliant when you pay yourself
In business, Uncle Sam is always there…
If you want to stay in his good books, you need to make sure you’re keeping compliant when paying yourself from your business.
As an entrepreneur, the way you pay yourself depends on your business entity. Are you:
- A sole proprietor
- An LLC or
- An S Corp?
Paying yourself as a Sole Proprietor or LLC
In order to pay yourself from your business, you need to take a draw.
This can be done by either transferring your pay from your business account to your personal account, or if you want to go Old School, writing a check.
This is pretty straightforward but there are two things you need to remember:
- NEVER USE YOUR BUSINESS ACCOUNT TO PAY FOR PERSONAL EXPENSES!Always make sure you’ve transferred from your business to your personal account before swiping your card, and never commingle your funds.
- Your Pay Has Not Been Taxed!When you think back to working as an employee, your employer stopped tax from your gross pay and what you took home was your net. As a business owner, everything you pay yourself is gross pay. You need to make sure you’re saving enough of that for tax at the end of the season. (As a rule of thumb I suggest saving 30% for tax, but check with your tax preparer.)
Paying yourself as an S-Corp
If you’ve elected for your LLC to be taxed as an S-Corp, the way you pay yourself is different. You actually pay yourself in two ways.
The first is what the IRS deems a ‘Reasonable Salary.’ This is a hugely gray area of course, so I strongly suggest working with a tax professional.
The IRS will tax you as an employee for the work you do in your business. This means looking at the day-to-day operations within your business and asking, what would you pay someone to do this work.
As an example, if you run a cleaning company you might spend time actually in the field cleaning. What would a reasonable salary be for someone to do this work? What would you pay someone to do your admin, payroll, marketing etc.
This is what would be classed as a reasonable salary, this is your W2 Wage.
The second way you would pay yourself as an S-Corp is your profit. Once you’ve deducted all your business expenses – which includes your w2 wage – you’re left with a profit.
You can take this profit as an owner’s draw, and the tax on that is going to be lower.
The purpose of this blog post isn’t to go into the nitty gritty of S-Corp, so again I strongly recommend you work with a tax professional if this is your situation.
I also highly recommend using an automated payroll system to take your W2 wage, and my personal favorite is Gusto. You can sign up with them here (full disclaimer, this is an affiliate link).
I know that paying yourself can seem pretty daunting, and you might find it useful to check out my YouTube training video on this topic.
I also have a plug & play resource to help you organize your business finances – including automatically calculating your quarterly taxes! You can get that resource here.
I hope that this post has helped you understand how to pay yourself, and if you have any questions, please drop me a DM. I am always here to help.