Paying Yourself (and Making it Count)
We get asked a lot of questions at The Freelance CFO. From how to get the best results from your tax returns, to which business entity would be best for your specific situation, to even whether or not you should actually get into Game of Thrones after all these years (we have opinions okay?).
But the question we get asked the most? It may surprise you.
“How the f*ck do I pay myself?”
We get it. It’s hard to find regularity and structure in paying yourself, especially in the early stages of your business. And it can be really scary to dip into money that could very well be used to help with growth, expansion, marketing or other necessary entrepreneurial things. But you didn’t get into this line of work just to work. You deserve to have your financial needs met just like everyone else. You want 👏🏽 to 👏🏽 make 👏🏽 money!
So… how do you actually do that?
Your Options
Something to keep in mind: your business’s entity structure will determine how you are legally required to pay not only your employees, but yourself. Just because you own your business, doesn’t mean you have complete and total autonomy over payroll (even your own). Overall, there are two primary ways that you can pay yourself as a business owner:
Salary
This is as straightforward as it gets; you get a salary just as you would if you were an employee of the company. Salaries are legally required for businesses structured as S-Corporations, C-Corporations or LLCs being taxed as corporations (i.e. LLCs with an S-Corp election). In this scenario, the IRS has a “reasonable compensation” clause. Basically, you should be getting paid what someone else in your industry is reasonably being paid for the same position, company size, experience, etc.
Pros: salaries provide stable, recurring revenue that can be budgeted into your business costs and crafted to match your lifestyle and goals (within reason, of course).
Cons: this is where that “within reason” part comes into play. Salaries aren’t flexible; the “reasonable compensation” clause must be followed even when business is bad.
Owner Draws
Pretty basic sh*t here. You withdraw money from the profits of your company on an as-needed basis, using cash, checks, or anything similar (“of kind”). This is most often used for sole-proprietorships, LLC or partnerships.
Pros: Flexibility, flexibility, flexibility. Your withdrawals can completely depend on your business’s performance.
Cons: Taxes are not deducted from your withdrawal.
Other Ways to Get Your Bag
You might be wondering - what about Venmo? And yes, that’s definitely a possibility (and could probably fall under the “Owner Draw” option). However, it’s actually a bit complicated for a variety of reasons, not least of all:
Ever-changing laws and regulations surrounding Venmo and other digital methods of pay;
The fact that Venmo was created for individuals; and
The fact that you shouldn’t mix your personal and business money.
Basically? There are better ways.
There are nerdier (cooler) ways to get paid from your business, including dividends. Those, however, are a bit more complex than what falls under a typical small business’s structure. If that’s something you’re interested in, speak to your bookkeeping team or a trusted fiduciary.
Using Both Methods
Let’s say you’ve gone the salary route, but your business is booming and you’d like to get some of that extra cash flow and treat yourself to something. Maybe there’s a sinking fund you’d like to top off, or an index fund you’ve been meaning to invest into. Or maybe you just want to get your nails done, eat some quality sushi and buy that new Playstation. You can absolutely continue with your regularly scheduled salary, and use an Owner’s Draw to transfer that extra income over to your personal accounts.
Now, you’ll still have to keep track of how much money you’re taking out in this way, not least of all due to tax considerations in the long-run. But, it’s still an option!
Taxes
Now, this is where a lot of our clients get a little nervous: “What if I’m paying myself wrong? What if I mess up on my taxes when I’m paying myself? Will the IRS come after me?”
We’re not here to shame you for having those fears, because for many people they’re very legitimate! Taxes can be really terrifying, confusing and mysterious. But with this? Take a deep breath. Your company’s profit is taxed. Your personal income is taxed. If your ducks are in a row and your bookkeeping is up-to-speed, everything is already in place to ensure the IRS gets what they’re owed, because it all gets taxed regardless of where it currently resides.
Our Biggest Tip
Set a schedule, set a schedule, set a schedule. Schedule your direct deposit or withdrawal to hit on a day that works for you, whether that be weekly, bi-weekly, monthly or otherwise. If you’re doing something old school - let’s say, using checks - write them ahead of time. On the day you’d like to deposit those checks into your personal account, set an alert or a reminder on your calendar or phone. Basically? Make it as easy, uncomplicated and as straightforward as possible for you to get exactly what you are owed, and exactly what you deserve.
Because you do, in fact, deserve it. 💛
If you’re a business owner in need of guidance when it comes to your business’s entity structure, bookkeeping, tax liability or otherwise, we at The Freelance CFO have you covered.
Want to streamline your business entity registration process? We got you.
Having trouble getting your books in order? No problem.
Have a specific question that only a finance pro can answer, one-on-one? We’re there.
And if you’re looking for some good listening material on your morning commute, Confident Money with Katelyn Magnuson has an entire season dedicated to business finances, including an episode specifically dedicated to how to pay yourself as a business owner (S01E08: “Foundations, Part 2: Paying Yourself”). Subscribe now and make sure to look out for new seasons, coming your way!
Disclaimer: The information provided in this blog is for educational purposes only and does not constitute financial or tax advice. Reach out to The Freelance CFO team with any questions regarding specific financial concerns, or seek the services of a fiduciary.
