How to Pay Yourself as a Business Owner

While many of us start businesses because we’re passionate about what we do (whether it be baking cookies, arranging flowers, or so on) or because we want to further a cause, the ultimate purpose of our business is to make a profit. And so it goes hand-in-hand that we should be paying ourselves a salary. But perhaps you wonder how exactly to do this – how much should you pay yourself and when? Is there a right way or a wrong way to do this?

These are all common questions that many new business owners ask themselves. Below we talk through what you should take into consideration as you prepare to pay yourself for the first time, how to do it properly, and what not to do.

It Varies Depending on Your Business Structure

The first place to start as you think about paying yourself a salary as a business owner is to consider how your business was formed. For instance, is it a sole proprietorship, limited liability corporation (LLC), S-Corp, or C-Corp? In essence, the structure of your business dictates how you should pay yourself.

Perhaps the easiest business structure to understand are corporations (C-Corps and S-Corps). In the case of both C- and S-Corps, as the owner you’re considered an employee so you need to put yourself on the payroll and pay yourself like you would any other employee (i.e., your taxes are withheld). A sole proprietorship, on the other hand, requires that you take what’s called an owner’s draw. So, for example, if you’re just starting out and can only afford to pay yourself $500 a month, move (or “draw”) this same amount to your personal checking account once a month (other options are $250 twice a month or $125 a week).

An LLC is unique in that it can be classified in different ways. Single-member LLCs, for instance, are treated like sole proprietorships (so you’d take an owner’s draw), whereas members of a partnership (an LLC with more than one member) will generally take distributions. Special circumstances exist when members are added to the payroll such as when an LLC chooses to be taxed as a corporation or there’s a particular employment agreement in place.

3 Best Practices When You Go to Pay Yourself

• #1: Pay Yourself a Reasonable Salary – While at the start you might take a modest salary so you have money left over to invest in your business, per the IRS you’ll want to choose a “reasonable” amount to pay yourself sooner than not – particularly so you can cover your personal living expenses.

• #2: Pay Yourself Systematically – It’s recommended that you take your owner’s draw according to a set frequency (like monthly, bi-monthly, or weekly) to keep your cash flow organized.

• #3: Pay Yourself a Whole Number – To keep things simple, pick a salary amount that is a whole number like $1,000 or $2,500 (not $1,000.04 or $2,500.83).

A Final Word From Tuesday P Brooks Owner of AJOY

Paying yourself a salary as a business owner is not only necessary and well deserved, it’s imperative. Just be sure to follow the proper way for your type of business. When it comes to how much, choose an amount that is reasonable (it should cover your personal expenses), modest (it shouldn’t put stress on your business’s finances), and a whole number (to keep things simple). Then just make sure to pay yourself on a schedule and you’ll be all set!