As a small business owner, plans should be made on how to pay yourself. To be well-compensated is a big part of feeling valued, confident and productive.
The Best Way To Pay Yourself From Your Small Business
Here are 4 simple steps to follow to figure out the best way to pay yourself as a business owner:
- Prioritize Your Pay
- Choose Payment Method
- Calculate Pay Rate
- Choose Pay Frequency
Prioritize Your Pay
If you hire people to work for you, you’d pay them on time, right? And probably offer them benefits like health insurance and retirement contributions. Even if that meant taking money out of savings, or taking on extra clients to cover payroll, right ?
So why don’t you prioritize your own “salary” as well? I too came to this realization and had to change my own mindset about paying myself.
As business owners we put our financial needs at the bottom of the pile, and then wonder why the heck we don’t feel properly compensated for our work. One way to change this is by taking yourself seriously, just as if you were an employee at your own company.
You have to view yourself as a vital part of what keeps your business going (obviously the most important part). In other words, you have to prioritized paying yourself just like you would pay an actual employee who worked for you.
Choose The Best Payment Method
Now that you’re on agree with me about compensating yourself properly, there should be a way to go about it.
There are several payment methods for self-employed business owners. No matter the kind of business you run, the best way is to..
Transfer Money From Your Business Account to Your Personal Account
Best for Freelancers and Sole-Proprietors
A bank-to-bank transfer from a business-designated bank account to a personal bank account is the simplest form of paying yourself a “salary”.
Basically, all the income you make is yours and there’s no legal need for separation.
But for the purposes of proper bookkeeping and admin, it’s a good idea to set up separate bank accounts; one for personal bills and household expenses and another for business-related income and expenses.
In this case, you’re free to withdraw money whenever you’d like. A simple transfer, check, or direct deposit is best for freelancers and sole-proprietors.
3. Choose an Amount / Calculate Your Pay Rate
As a business owner, note that you have to be paid “Reasonable Compensation” for your efforts.
Most times, freelance business owners under or overpaying themselves based on the business’ profit margin,
How do you calculate the proper amount for getting paid? What’s the exact formula for paying yourself as a freelance business owner?
CALCULATE BUSINESS OWNER PAY //
Profit (or loss) =
Total revenue – business expenses
Taxes = 25-30% of profit
Your Paycheck = 70-75% of profit
CALCULATE BUSINESS PROFIT
Profit (or loss) =
Total revenue – business expense
Taxes = 30% of profit
Reinvest back into business = 10% of profit
My paycheck = 60% of profit
4. Choose How Often To Pay Yourself
Now, scheduling your payment, the right answer will depend on your business setup and your personal needs, but there are some basic recommendations
- Semi-Monthly (twice-a-month)
- Biweekly (every other week)
Obviously, nearly everyone wants to be paid on a more frequent basis.
But you also have to take into account of making transfers back and forth, recording these transactions in your bookkeeping software, and following up with client payments more often.
Please, keep in mind how important it is for you to compensate yourself properly, so you can feel worthy in your work again.
Nobody likes doing work for free, and you’ll continue to grow bitter and hateful towards your finances if you don’t reward yourself with the money you deserve.