One of the best parts of running your own business is paying yourself, but too many small business owners don’t understand how to – or worse, they put their own interests last and don’t pay themselves at all!
How to Pay Yourself as a Sole Proprietor
As a sole proprietor, you are your business, and the IRS taxes you accordingly. Whether you actually pay yourself or not, you’ll be paying taxes on the money your business makes – which is why it’s important to actually pay yourself! So how do you do it?
Separate Business from Personal Accounts
One of the biggest mistakes sole proprietors make is to mingle business and personal accounts. You need to have separate accounts from the beginning – and if you don’t, start now! All business income should go straight to the business account.
Pay Yourself Regularly
The good news is, as a sole proprietor you can withdraw money from that business account any time you want. Simply write a check from your business account to yourself and deposit it! There’s no need to pay yourself a designated salary. However, setting a monthly amount you want to pay yourself from the business is a great way to ensure you are actually paying yourself. Treat it as another business expense, that way you won’t get to the end of the month and realize your business is out of money and you haven’t paid yourself yet.
How to Pay Yourself as an LLC
If you’ve formed an LLC that’s being taxed as a sole proprietor, you can pay yourself exactly the same way as above. The LLC provides legal protection but doesn’t change your tax status in the eyes of the IRS. You’ll still be paying self-employment tax on the income made in your business. If you’re interested in mitigating some of that liability, you’ll want to consider filing an S-Election – but more on that another time!
How to Make Sure You Have the Money to Pay Yourself
Of course, you want to pay yourself, but do you feel you never seem to have enough left at the end of the month? As a small business owner, it’s tempting to pay yourself based on what’s in your business account. You had a great month, so you take out more than you usually do, but the next month you’re scrambling to cover expenses, and you can’t take out any money.
You may want to consider looking into something like the Profit First system. This system encourages businesses to have multiple checking accounts with designated purposes – and to focus on putting profit first. The options are endless, but the standard accounts are typically for:
- profit
- owner’s pay
- tax
- operating
- revenue
Having designated accounts for everything makes it easier to see how much money is really available for you to withdraw. If you want to learn more about Profit First, you can check out Mike Michalowicz‘s book. It’s a lot of information, but remember that you don’t have to follow everything. Simply understanding the Profit First mentality can make a big difference.
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.
