I get asked all the time how entrepreneurs and creatives should pay themselves. Here’s the answer in 3 easy steps!
Keep All of Your Business Money in a Business Account.
Even though certain business organizations do not require you to keep your business profits separate from your personal finances,you should definitely keep them separate! Keeping your business finances apart from your personal account will make it easier to do the accounting work for your business and file taxes at the end of the year. Plus, it's easier to pay yourself from your business account and transfer money into your personal account! Save yourself the headache and keep them separate from the start!
Transfer Money to your Personal Account to Pay Yourself
As a small business owner, creative, or entrepreneur, we are constantly investing back into our business. It's how the system works! But, that doesn’t mean you have to investall of your business revenue back into your business. You CAN and you SHOULD pay yourself! But, hold up, this isn’t a green light to take out all of the business revenue you make and transfer it into your personal account. Each individual is different, but you should find a balance that works for you. Keep some revenue in your business account in case of emergencies or further investment (I always have $2500 as my “$0” amount and keep that in my business account), and then transfer periodic amounts to your personal account to pay yourself for all of your hard work. If your small business is your only source of income, budget out your “needs” and “wants” and decide how much you need to transfer into your personal account every month or every two weeks to make that happen!
It doesn’t matter if you pay yourself daily, weekly, bi-weekly, or monthly. But, try your best to keep it consistent so that your books look legit. However, the amounts don’t need to be the same (because you could have different weeks and months of income, and hours worked).
P.S. You can totally write yourself a check if transferring isn’t an option. Just make sure you have what I call a “cha-ching!” moment from one account into another that is documented and available for review.
Business Status and Legal Considerations
It is important as a self-employed individual to know how you registered your business and the tax implications that come along with that type of business. The type of business you run will change the way you need to pay yourself!
While a sole proprietorship carries the most amount of risk because all liability falls on you, it is the most advantageous in terms of profits. If your business is booming, the profits are all considered yours. Under a sole proprietorship, profits from the business and your personal income are treated the same by the IRS--there is no distinction. Your income is the resulting profit after deducting all your overhead expenses on Schedule C of Form 1040. You are taxed on that portion, including a tax for social security under the Federal Insurance Contributions Act. Remember, even though all profits are personal income, it is crucial that you keep your business profits in a separate business account. This will make your life SO much easier and you can easily pull your income from your business account and deposit it into your personal account!
If your business is set up as a partnership, the IRS will see it largely in the same way as a sole proprietorship.Any profit generated through a partnership is treated as personal income. Instead of completing Schedule C of Form 1040, however, partnerships must file Form 1065, U.S. Partnership Return of Income. Having documentation of your payments to all the partners is crucial for your tax return.
If you are reading this article your business is probably not a corporation, but it is nice to know what is required of one! If you own a corporation, you will get paid a salary like any other employee. The big difference with a corporation is that any profit the business makes will accrue to the corporation, not to you personally. At the end of the year, you must file a corporate income tax return.
If you have any logistical questions about paying yourself from your own business, comment below! The Legal Paige wants to help you do it right... both legally and efficiently.