Your business is your baby. You want it to be happy and healthy and profitable. But it’s easy to put so much time and energy into your work that you forget about yourself. We work with plenty of business owners that put so much effort into making sure their business is financially successful that they forget about their personal banking account.
Your business exists to take care of you. So instead of saving all your earnings or keeping every cent in the business account, take the Profit First approach and start paying yourself too. Many business owners get overwhelmed by the specifics of putting money in their pockets. The process can be pretty straightforward, though. Let’s look at a few common questions business owners have when it comes to adding themselves to the payroll.
How Much Should I Pay Myself?
The answer to this question will depend on the specifics of your situation, but the advice is all guided by the same principles. You can look at the Profit First allocation percentages to see how much you should shoot for each month. You don’t have to follow these guidelines exactly, but it can provide a good starting number to consider.
Next, you want to think about how much risk you’re willing to take on. Leaving some money in the business each month or stashing a little in your personal savings could make it easier to confront unexpected problems. The important thing to remember is not to save all of your money. Try to determine exactly what you’re afraid of and put a value to it. That might be needing a new roof on your office building or a month without income. Decide about how much this will cost and allow that number to guide how much you need to save each month. The rest can be your income.
Here’s an example of how one business owner might choose to pay themselves:
- Ted’s business makes $10,000 each month. His operating costs are $5,000 and he sets aside $1,500 for taxes. The roof on his office building has been patched twice before and his carpenter says it might be time to replace it. He saves $1,000 each month to go toward the cost of a new roof. That leaves him with $2,500, which he autodrafts into his personal checking account on the first of the month.
Ted decided how much to pay himself based on his business’s needs and his savings goals. It’s important to look ahead when determining how much you’ll pay yourself. This can help you strategically plan your personal income and your business savings.
When Should I Pay Myself?
Some business owners think they need to wait until they can take a full salary before they start paying themselves. It’s actually better to start paying yourself as soon as you can, even if it’s just $100 per month. This shows you’re making an income (even if it’s small) and keeps you from leaving extra funds in your business account that you might spend unwisely.
As far as frequency, it’s important to be consistent with your payments. Try not to take money whenever you need it. Instead, pick one or two days of the month that you pay yourself the same amount. This creates a trail of consistent income and proves you have a reliable job. That makes it easier for lenders to see you have steady income when it comes time for big purchases like a home or car.
To help make things consistent, you should have a payment process in place. This might be an auto draft to your personal bank account on the first of every month or a check written from the business to you on the 30th. Whatever system works best for you, as long as it’s the same month-to-month.
How Do I Pay Myself?
There are two ways you can pay yourself as a business owner. The first is called owner’s draw. This just means that you pay yourself directly from your business account, without going through a payroll account. You can transfer money between bank accounts, write yourself a business check, or use whatever process works for you. Just be sure to make a note on the transaction that it’s an income payment to yourself.
With owner’s draw, taxes aren’t withheld or calculated at each transaction. So at the end of the year, having that consistent log of payments makes it easy for your CPA to calculate your income and taxes. You’ll pay taxes on these payments when you file your return.
The second option is to go through a payroll account and pay yourself a salary. Again, this can be through direct transfers or writing a paper check. With a salary, you pay yourself the same amount each pay cycle and taxes are taken out of each paycheck. So instead of having to pay taxes at the end of the year, you’ll have already been contributing based on your income tax bracket.
Tips and Reminders for Paying Yourself
The main thing to remember when it comes to paying yourself is that consistency is king. Your aim should be to pay yourself the same amount on the same day(s) each month.
Business revenue can fluctuate considerably month-to-month, especially in highly seasonal industries. In these situations, focus on consistently paying yourself a smaller amount rather than taking big paychecks in peak times and nothing in slow months.
The easiest way to find your ideal number is to base it off of the two lowest-income months of the year. That way you know you’ll always make at least that amount to pay yourself. You can always take more if you need it in those busy periods.
Another tip is to use the Profit First allocation percentages as a starting point if you’re not sure how much to pay yourself. The program researched lots of businesses to come up with their numbers, and it will act as a guide to ensure your business is taking care of you like it should.
Pitfalls
The main pitfall to avoid is not mixing business with personal spending. It can be tempting to operate directly out of the business account when you own your enterprise. But buying groceries with the company credit card only makes it more difficult to assess how well your business is doing and how much income you make each year.
Set up a separate business account that you use solely for business expenses. Be sure to draft your income into your personal account and shop or save from there. This makes both your day-to-day operations and your end-of-year tax meeting a whole lot easier.
Closing
It might seem tricky to know how much and when to pay yourself when you’re a business owner. Just keep in mind that consistency is key and your business should be taking care of you. There’s always a balance between what your business needs and what you need, you just have to find it.
If you’d like some help finding it or could use a little extra advice, schedule a call with us. We’d love to help you find a way to pay yourself each month while your business succeeds.