How to Manage Your Money as a New Entrepreneur (Part 3): How Should I Pay Myself?

Pay Yourself as an Entrepreneur

You did it.

You hustled, created a kicka$$ social media strategy, pitched to some clients, and now have money flowing into your business. But how much of that should you actually be funneling back to you?

Great question. But what most entrepreneurs don’t realize is that this isn’t just a matter of determining how much to pay yourself.

It’s also discussion on how to go about making those payments.

FUN FACT: Each business structures has different tax implications, meaning that just knowing the best way to pay yourself could mean THOUSANDS more per year in your pocket.

Yes, you read that right.

I literally meant THOUSANDS, and that’s not just for those making 7 figures.

So how do you find this magic number that will not only allow for growth in your business but also fund your Joanna Gaines kitchen remodel AND save on taxes?

We’ll start with the how much.

HOW MUCH TO PAY YOURSELF AS AN ENTREPRENEUR

Unfortunately, there isn’t really a set formula to use to calculate this because everyone’s needs are different.

You may have a spouse who makes good money, meaning you don’t need the cash right now and, thus, can pour more back into the business.

You may be the sole provider and MUST cover the bills.

You may be working a full-time job but started this business to fill your vacation fund, meaning you can take out whatever gets you to Napa Valley for girls’ weekend, but the rest can stay in to help you afford a virtual assistant. (You know, because answering emails can suck.)

So here are my suggestions to find the right balance between fattening your pockets and growing your business.

DIVE INTO YOUR GOALS

 What is it that you’re using this business for?

 To pay off your debt? Allow you to quit your full-time job? Earn multiple six-figures? Just have extra spending money for a nice wardrobe? Fund a charitable endeavor?

Getting clear on what you actually want from this is key to figuring out this balance.

WHAT DOES THAT LOOK LIKE?

So you have debt to pay off. How much?

Want to throw the deuces to the boss at your full-time job. What amount will that take?

Run the numbers to see how much you actually need to achieve that goal. Entrepreneurs tend to determine this by throwing a dart, but many times you’ll find you need MUCH less than you originally thought to get there.

WHEN DO YOU WANT IT?

Set a deadline. Plain & simple.

WHAT DO YOU NEED TO GET YOU THERE?

 Here’s where you actually list out what it’s going to take to get you to that goal.

And be specific. Do a brain dump where you write down everything that comes to mind, and then start weeding through all those thoughts.

You’ll find many things that you think need to be done really don’t move the needle, so this exercise will help you focus on what is truly going to get you closer to your goals and enable you to create a game plan to get there.

WHAT’S THAT INVESTMENT LOOK LIKE?

Unfortunately, the world doesn’t sell everything for $FREE.99. Thus, some of those action items are going to cost money, and you need to know what those dollar amounts are to ensure the return is there.

For instance, let’s say you could invest $1,000 in Option A or Option B. If the former is estimated to bring you in 4 more clients and the latter is estimated to only bring you 3, what makes the most sense? (Hint: It’s not Option B.)

Make sure you are aware of this number and when you’ll be needing those funds for investment so that there is money still in the business to support it.

ULTIMATE RULE: ALWAYS PAY YOURSELF SOMETHING

 Let me scream this from the mountaintops.

Even if you’re in uber growth mode, I want you to ALWAYS pay yourself something. You need to be rewarded for your time, even if it’s only enough to fund a monthly massage. (You deserve it, girl!)

 And if you want a little help in figuring all of this out, I’ve created a fantastic tool that I use myself (it helped me TRIPLE my revenue in one year alone!) called the Profit Planner. Just click below to head to get a copy!

 GET YOUR PROFIT PLANNER

HOW TO PAY YOURSELF AS AN ENTREPRENEUR

Okay, we’ve figured out how much is going to be funneled to your personal bank account. Now we need to figure out how to do it so that more of it stays in your pocket (and less goes to the government).

SOLE PROPRIETOR

As a sole proprietor, you can only pay yourself one way: by writing yourself a checking or transferring money from your business to your personal bank account.

Sole proprietors are not eligible to be set up as salaried (W-2) employees under their business, so distributions are currently the only option.

However, please make note of three important facts:

  1. No matter how much you pay yourself, you are always taxed on how much PROFIT your business makes in a given year. So even if you only pay yourself $35,000 of the $50,000 your business earned, you still have to pay tax on the full $50,000.

  2. You not only have to pay federal and state income taxes on that profit, you also have to pay self-employment tax, which is roughly 15.3%.

  3. Those distributions you pay yourself are not tax deductible so they cannot be listed as an expense. Instead they reduce the amount of equity you have in your business.

LIMITED LIABILITY COMPANY/PARTNERSHIP

 As the owner of an LLC, you can pay yourself through distributions (as referenced above), guaranteed payments, or, if you actively work in the company, a salary.

Guaranteed payments are specific amounts guaranteed to be paid to a member of the LLC no matter if the business is running a profit or a loss. They are deductible as an expense to the business and must be included as income for the owner receiving the payment (meaning they, too, are subject to income and self-employment taxes).

Now let’s dish the dirt on salaries.

 Any wages, payroll taxes, benefits, etc. are able to be expensed through the business; however, note that you will incur additional expenses as employers (even if you are only employing YOU as a W-2 employee) must pay their own portion of FICA taxes AND unemployment insurance for both federal and state.

In other words, you’re going to incur another expense, which is why most people typically don’t pay themselves as a salaried employee unless they are ready for S-Corp status.

Let’s get to that.

S CORPORATION

The biggest pull to structuring your business as an S Corp is to take advantage of the benefits around paying yourself a salary, which is a requirement for owners under this structure.

Paying yourself a salary is good for one reason: Social Security. When you are a W-2 employee, you get on their radar, meaning that you will receive benefits once you hit retirement age.

Now for the bad news: In all other business structures, when you pay yourself a salary or a distribution, you not only have to pay the employee portions of FICA taxes but you also have to pay the employer portion, too. Combined, these come out to roughly 15.3% of your income.

However, as an S Corp, while you have to pay yourself a “reasonable” salary for your role in the business, any additional distributions you pay yourself are NOT subject to self-employment tax, meaning you automatically save 15.3% on those distributions.

So if you were paying yourself $80,000 under the LLC structure, you’d have to pay $12,240 in self-employment taxes.

In an S-Corp, you’d have to determine a reasonable salary for what you do, but let’s just split it down the middle for illustrative purposes.

So you pay yourself a $40,000 salary, which results in a $6,120 self-employment tax liability. The remaining $40,000? No self-employment tax.

How’s that for some savings?

C CORPORATION

In a C Corporation, you must pay yourself via a salary OR dividends, which is kind of like a distribution.

However, note with dividends that they have to be paid evenly across all owners of the same classification of shares. So if you structure yourself under this entity-type with three partners and you all have the same amount & type of shares, you cannot pay yourself more or less than the others.

Thus, if you’re actively working in the business, it’s best to set yourself up as a salaried employee and take dividends as a bonus.


Okay, lady, now that you’ve filled your toolbox with all these knowledge nuggets, I hope you sit down and develop a game plan to paying yourself so you make all of this hard work WORTH IT.

And if you have any questions, you know where to find me.

Until next time.

Xoxo,

Britt