By Hope Brown
Entrepreneurs who are sole proprietors and single-member LLCs business owners work hard in their businesses. There’s little doubt that being able to grow and scale the business into a profitable venture is every business owner’s dream. An important part of that dream also involves being able to pay yourself. This article covers tips for properly paying yourself in business as a sole proprietorship or single-member LLC business owner.
Once the business is profitable and generating income, usually business owners want to know how they should go about paying themselves. For business owners who in most cases are already working in multiple roles within their business including accounting, paying themselves can be a confusing task.
Paying yourself from your business is actually a straightforward and simple process. Let’s look at (7) steps you can take to properly pay yourself as a sole proprietorship or single-member LLC business owner while remaining compliant.
1. Have a separate business bank account.
It's considered a good accounting practice to have a business bank account set up to deposit incoming revenue earned by your business. This account can do wonders with solving the problem of commingling between business and personal financial activities experienced by many entrepreneurs. It also contributes towards simplifying financial
tracking during the year and later during the tax season.
2. Only pay yourself when there’s enough revenue to cover business expenses and cash flow.
Remember, don't pay yourself too much too soon! Do a financial check-in to make sure the business has enough revenue to cover basic expenses and a solid cash flow before paying yourself. Taking too much too fast can negatively impact your business growth.
3. Transfer money properly from business to personal accounts.
This is the fun part and actually easy to do! To pay yourself, simply transfer or do what is called an “owner’s draw” of the desired payment amount from your business bank account to your personal account. Any payment method used should be trackable such as ACH transfer, check, or another method that shows the funds leaving the business account and arriving at your personal bank account.
4. Track and record your owner's draws in your accounting system.
Make sure to maintain records of all owner's draw information such as date, amount, and the method of transfer used. This will be critical in helping you to create a paper trail for accounting purposes in your business.
5. Taking money out to pay yourself isn’t a business expense.
Any owner's draws you make during the year are considered taxable income. Sometimes business owners don’t realize that money they're paying themselves is not considered a business expense and not deductible. You may owe income taxes on this money, so plan ahead.
6. Don't forget about income and self-employment taxes.
In addition to income taxes, you may owe self-employment tax on money you pay yourself. The self-employment tax rate is 15.3% so also plan ahead and don't let this tax sneak up on you later during the tax season.
7. Set aside money for your estimated quarterly taxes.
Be sure to set aside a portion of your owner's draw to cover estimated taxes on that articular income. You may need to pay quarterly estimated taxes to the IRS to avoid underpayment penalties that can occur.
Final Thoughts
Taking an owner's draw is an important milestone that allows you to reap the rewards of your hard work and successful enterprise. It’s important to follow these or similar steps which can help ensure you both pay yourself correctly and monitor cash flow in your business efficiently. Regardless of how you pay yourself, a final suggestion is to consult your own tax or other accounting professional to help access your unique situation. Having someone look at your numbers to review them who can help you through this process initially can be a huge advantage as you begin the process. I hope these tips help you make that first payment to yourself both confidently and compliantly.
About The Author:
Hope Brown is the owner of The Tax Minded Bookkeeper. Connect with her on Instagram or LinkedIn.