Paying yourself as an entrepreneur.
Seems simple enough but a LOT of business owners, especially in the early days, struggle with it:
✅ How much should I pay myself?
✅ When should I pay myself?
✅ What's the best process to pay myself?
How to Pay Yourself:
The process of paying yourself as a business owner is fairly straightforward.
First, if you’re a sole-proprietor or a single member LLC that is not taxed as an S-Corp, you’re going pay yourself what is known as an “Owner’s Draw”.
Sometimes, you might hear people refer to these as “distributions” which isn’t technically correct but you can go ahead and call it that if you want.
The actual mechanics behind you pay yourself through one of these Owner’s Draws or Distributions is pretty simple.
First, you can pay yourself through ACH where you just transfer the money from your business account to your personal checking account.
The next way you can pay yourself is through something like Zelle.
Finally, if you want to go super OG, you could withdraw cash from your business through an ATM and then deposit it int your personal account. Or you could even write an old school paper check from your business bank into your personal checking account.
Here’s the thing that you’ve got to remember: when you pay yourself through an Owner’s Draw, there are no taxes withheld.
So, you’re going to want to set some amount of money aside so that when your quarterly estimates are due, or when you pay taxes at the end of the year, you’ve got some money already earmarked for that.
If you’re an LLC that is taxed as an S-Corp there are two different ways that you pay yourself.
First, you have to pay yourself what is known as a “reasonable salary” which is paid to you just like payroll that you would pay for an actual employee of your company.
I want to 1000% recommend that you get the assistance of a payroll provider like Quickbooks or Gusto because there are taxes that have to be paid and the forms that have to be submitted throughout the year can be super confusing.
The second way that you can pay yourself as an LLC with an S-Corp election is through distributions which are paid the same as those Owner’s draws we talked about earlier. You can use ACH, Zelle, written checks, etc.
How MUCH Should You Pay Yourself:
The short answer: it depends.
In general, I want to make sure that you’re leaving enough in the business to cover all of your operating expenses.
I highly highly highly highly highly HIGHLY suggest that you use a cashflow forecast to help you figure this out.
One of the biggest mistakes that I see, especially early stage entrepreneurs making with this is, maybe you’re a coach or course creator, you’ve had a really successful launch and you bring home a ton of cash.
You might be inclined to take all of that home to celebrate but the problem with that is you’ll find later that you may not have enough money to reinvest in the business on things like growing your team or doubling down on your marketing spend which can result in your business getting stuck.
I want you to be really mindful of this.
Now, if you’re an S-Corp owner, there are some rules that dictate how much you have to pay yourself and the IRS calls this amount a “reasonable wage”.
How much is a reasonable wage?
Great question! The concept of “reasonable wage” is something that the IRS came up with a while back and, honestly, it’s super confusing.
But, generally this is what it’s telling you: if you were to go out and hire somebody off the street to come in and do the job that you do, as CEO for your company, how much would you have to pay them?
This means that you’re gonna have to go out and do a little bit of research to figure out how much you would actually have to pay somebody to come in and do your job, which isn't always easy.
So I want to encourage you to hire the help of a CPA or tax expert to help you figure out how much this amount is.
How Often Should You Pay Yourself:
For once, there are no rules, regulations, or IRS codes that dictate how often you have to pay yourself.
It could be daily, weekly, monthly, yearly or anything in between.
If you’re just starting out, your revenues are probably not super consistent yet so what I would encourage you to do is pay yourself once a month, based on your business’ cash flow needs.
Once your revenue has become more consistent, what I would love for you to do is find a fixed amount that you know your business can pay you every other week.
That’ll make your personal life so much more predictable which reduces a ton of stress. Then maybe like once a quarter you can take a look at your cash flow needs and pay yourself a little bit of a bonus if you’ve got some money left over.
Quick Time Out:
If you’ll notice a common thread in this blog, it’s the fact that you’ve got to understand your business’ cash flow needs if you want to make smart decisions about how much you can pay yourself and understanding your cash flow needs doesn’t just inform how much you pay yourself, it really informs almost everything that you do in your business.
After doing this for years and years and working with hundreds of business owners, I can tell you that the number one tool that you can have in your business toolbox is to understand how to forecast your cash flow needs.
If you don't have a cash flow forecast in your business, sign up for my free 5 day cash flow challenge at www.cashflowchallenge.com.
It will be a game changer!
