I know far too many hard-working, kick ass entrepreneurs that *gasp* don’t pay themselves regularly. In my opinion, that’s a big no-no and here’s why: you are the heart and soul of your business. You put in endless hours to help your business thrive. You DESERVE to get paid.
Another fantastic reason to pay yourself on a consistent basis is to motivate yourself keep on keepin’ on when you’re getting discouraged. Look, it happens to the best of us. Sometimes we lose a little momentum, but then your self-made paycheck lands in the bank and it reminds you of why you started. It also helps you check the pulse on your business’s overall financial health. But how do you go about it? It can be a little confusing, especially in the early stages of business building.
Okay, first thing’s first – what is the structure of your business? That’s the biggest factor that you need to know prior to making that deposit.
If you’re a sole proprietor, ownership, or limited liability corporation (LLC), then you can take what’s called an owner’s draw. An owner’s draw means that you can take from your business’s profits as needed up to the amount that you’ve invested. Pretty easy, right?
Things are a little more complicated, however, if your business is structured or taxed as a corporation. That means that you have to take a salary instead.
If you’re not sure which method to choose or the structure of your business, please take the time to consult with an attorney. They will help guide you through this process and make sure everything is above board.
If you’re paying yourself via an owner’s salary, then you get the benefit of having your income taxed upfront. That’s unfortunately not the case with an owner’s draw, which means that you’ve got to be on your tax-saving A-game so you don’t get caught out when April 15th rolls around.
A generally safe rule of thumb is to set aside 30% of your earnings for tax time. That should cover you so you don’t have to figure something out when you find out you owe a lot more than you saved.
This is a huuuge thing to keep track of – it’ll help make sure that you have enough money in your business account to keep your literal (or figurative) doors open.
How much do you spend on your computer software? How much do you pay any independent contractors or employees that you have? How much are you paying to to keep your website up and running?
These are all things to consider – estimate the annual cost and add it all up!
Once you have a good idea of your costs and how much you need to set aside for taxes, you can comfortably estimate your monthly pay (yay, more estimations!). Add up the income from all of your projects booked thus far, and then subtract how much you need for costs and taxes. Divide the remaining total up and that will tell you what you can pay yourself each month.
You may continue to add projects to your calendar, so it’s important to reevaluate your pay as you go. That way you can continue to pay yourself a fair amount while taking into account new bookings and income.
I know financial planning doesn’t excite most of us, but it’s something that you need to do if you’re interested in continuing to grow your business. Having a plan makes it easier to reach your goals, and you will always have an understanding of where you’re at at any given time.
If you need help with financial planning, find an expert that can work with you on growing your business finances. It’ll be worth it, I promise!
What do you think about these tips? How do you pay yourself in your business? What are your goals and dreams for your future income?
Let me know your thoughts down below in the comments!