Who doesn’t love getting paid!
You take money out of your business whenever you need it. A little here, a little there. You love this system. Just get money whenever you need it. It’s just like an ATM until you run into cash flow problems. Stay with me here.
If you willy nilly it and take money from your business whenever you want to, there could be times in the month where you don’t have enough money to pay yourself.
Bummer.
Game Changer.
We’ve got to get you paid. Like first. Like. Right. Now. Let’s get you in the habit where you pay yourself first. I’m talking a regular consistent salary or draw. It needs to be high enough to meet your living expenses.
That way, you can cover your personal monthly nut, including Thursday night sushi. You will also be able to budget for what could be your largest fixed business expense – paying you!
In the back of your mind you are going to work smarter to make sure you have enough money to meet your new fixed salary.
So what’s your personal monthly nut? If you know this, you can determine how much to pay yourself. That’s step 1.
Step 2: Have a glass of Rosso Di Montalcino (I’m going there in 1 week! Montalcino, Italy!). Do whatever you need to do to get in a state of mind where your financial sitch isn’t going to overwhelm you. That could be a little vino or a financial planner, CPA, or bookkeeper too.
Step 3: You need to know if you should pay yourself a salary, a draw, or a combination of both. A salary is where taxes are taken out of your paycheck. A draw is where you just take money and pay no taxes.
FYI… when you pay yourself a salary, here are the taxes that usually get taken out:
- Social Security taxes
- Medicare taxes
- Federal taxes
- State taxes
- State disability payments
Stay with me. You really need to know this stuff so you won’t have to worry so much about money. Keep drinking the Rosso.
Paying yourself a salary depends on what type of legal structure your business is. If you are a sole proprietor or single member LLC, you just take draws. If you take a draw, you must set aside enough money to pay your taxes.
If you are an S Corp, you must take a salary. You could take a draw as well. Many business owners take a low salary and take higher draws. They try to get around paying payroll taxes. It’s all fine and dandy, until the IRS audits you and they nail you.
It’s generally recommended to pay yourself a minimum salary of 50% of your profits. You need to review these options with your accountant. Yes, that means you have to call them or just forward this to them. If they don’t call you back and want to work on this with you, find someone who will.
If you think you might need to raise/borrow money, or sell your business…
You are going to want to show the bank or your buyer that you consistently pay yourself a salary/draw. It just looks good.
Here’s the deal. Entrepreneurs need systems. This should be one of them. We just gotta get you paid. Consistently.
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