Have you struggled with how to pay yourself as a small business owner? Maybe you're a solopreneur—does it matter how you pay yourself in that case? The answer is yes! Let's look at the right way to pay yourself so your business can grow and avoid legal issues.
Congratulations, business owner! Your small business is starting to rake in a profit, and now it’s time to cash in on all your hard work.
One question we hear a lot from business owners is: How do I pay myself?
That’s a fantastic question—and we’re happy to answer it. After all, there is a right answer to this. And the wrong answer can land you in some trouble.
Allow me to illustrate.
Let me describe for you a hypothetical couple running their own business. Kacey and Ted are the savvy owners of an office-space cleaning company. They have a strong business model and the kind of high-quality services their clients clamor for.
Within a year of launching the business, Kacey and Ted begin to make a sizable profit. That’s impressive, considering that most businesses take 2-3 years to go beyond breaking even.
When it comes to sales, customer service, and networking, Kacey and Ted are pros. They’re experts at running their business. But they’re not exactly sure how to pay themselves.
So instead of coming up with a system, they simply draw a large sum of money from their business whenever they need to pay for their home mortgage or groceries.
After all, it’s their money, right?
We’re here to tell you—don’t be like Kacey and Ted. At least not when it comes to paying yourself.
Why It’s a Bad Idea to Pay Yourself Like That
The reason it’s a bad idea to pull money from your business however and whenever you want is that you run the risk of mixing your personal and business finances. (More on that to come in next week’s blog!)
It’s important to keep those finances separate for legal reasons. Because of that, you need to create a system for paying yourself. Thankfully, it’s not that hard!
Salary or Owner’s Draw?
You have two options when it comes to paying yourself from a small business: pay yourself a set salary or take an owner’s draw. (Technically, you can also do both!)
When you pay yourself a salary, you determine a set amount of money you’ll receive each pay period. Then, you need to go through the same payroll process to pay yourself as you do to pay your employees. Your salary needs to be a reasonable number for your position. To determine that, try looking up similar position titles on sites like Glassdoor, Salary.com, or Indeed.
An owner’s draw, on the other hand, doesn’t have to be a set number at a set time. Instead, you simply need to categorize it as an owner’s draw. In essence, you give yourself a check and then deposit that money in your personal bank account.
Pay Yourself From Profit, Not Revenue
For smaller businesses—such as a sole proprietorship, single-member LLC, or partnership—an owner’s draw is more common. After all, with smaller businesses like these, business income may fluctuate month to month.
You can schedule a consultation with one of our accounting experts to see which strategy is best for your business!
But either way, you need to make sure that you’re paying yourself out of your business’ profit, not its revenue.
Before even determining how much to pay yourself, you need to figure out how much your business spends. This includes fixed expenses (think rent, utilities, employees’ salaries), variable expenses (such as taxes, marketing, or product materials), and any one-time expenses you have yet to pay for.
Hint: Make sure you double check all your charges on all your credit cards. You don’t want to pull your owner’s draw and then not have enough to pay the cards off!
Subtract your expenses (plus some cushion) from your total revenue, and there you have it. A starting point for determining how much to pay yourself and your business partner if you have one.
How to Pay Yourself Through QuickBooks
Once you’ve determined how much your salary or owner’s draw will be, it’s time to get your money!
If you use QuickBooks Online, the process couldn’t be simpler, but we’ll walk you through it anyway.
To start, open your QuickBooks account and click the plus sign in the center at the top of the dashboard. Select Check under the Vendors tab.
Now you need to add a payee. If you haven’t taken an owner’s draw before, click Add New and list yourself as a vendor. In the Account section, type Owner’s Draw and add it as an Equity expense and save it as Owner Distribution or Partner Distribution.
Next, add a description and put in the amount you want to pay yourself. If you’re handwriting yourself a check, then add the check number in the righthand box near the top of the screen. If not, select Print Later.
If you’re a more visual person, watch this video tutorial on how to record an owner’s draw for the first time.
Did you find this blog post helpful? Let us know your thoughts in a comment below!