How do I Pay Myself as an Entrepreneur?

If you run your own business, chances are good that you have wondered, at one time or another, “How am I supposed to pay myself?”. Oftentimes as entrepreneurs we focus so much on building the business that we skip over this essential part of maintaining the “flow” in our personal (and business) finances!

We often pull money from our business only when we feel we need it to “cover” our expenses. This can lead to life feeling a bit chaotic, unpredictable and can often leave us feeling “bad” about pulling money out of our business.

Wouldn't it be great if there was a way to always feel good about taking money to pay ourselves? What if there was a way to have more consistency and predictability when it comes to our business and personal finances? In this article I will address these questions to help you create more ease and less stress when it comes to the financial side of running your business…and your life!

First I want to address this idea of giving yourself a “paycheck”. Oftentimes this is an idea that causes my clients to stress. It isn’t unusual for an entrepreneur client to tell me they “don't have a paycheck”, because it always changes from month to month. Often it depends on what the business makes each month and what is needed to cover their personal expenses. This is the first thing we need to create structure around, because this feeling of uncertainty around “how much” to take can be a huge cause of stress in our lives.

So, where do we begin when we look at trying to create a paycheck structure in your business? The FIRST thing you need to know is HOW MUCH you actually need to pay yourself in order to cover your personal life expenses. Our personal lives and businesses are so intertwined, that we really can’t even begin to plan for our business if we don’t first know what to expect in our personal lives. Our personal expenses are much more stable and predictable than those in our business, so it makes the job easier if we lay the groundwork there first. Once we are clear on our personal expenses it actually become so much easier to build our business, determine our prices, charge for services, programs or products, etc.

In order to determine your personal expenses, you can hop over to my website (www.jillemanuel.com) to request my Five Top Money Tips free training, that will walk you thru how to get your personal expenses organized and streamlined. Getting a clear and accurate representation of what your personal expenses are is how you will determine what your “paycheck” will need to be from your business. Once you know your personal expenses you can easily see how much you need to pay yourself from your business in order to cover them.

After you have determined your monthly paycheck amount, I want you to divide that number by two and create your own pay cycle. Choose the two dates per month that you will pay yourself – and be consistent! If you decide on the 1st and the 15th, this means that each and every month you will transfer money from your business into your personal checking account on those dates, just like clockwork. Now that you have created a pay structure you will begin to feel a WHOLE lot more stability and predictability in your life.

The last thing to address when we talk about creating a paycheck, is how to prepare for taxes. I know, the dreaded word….taxes! But we definitely need to be prepared for them and you don’t want to be one of the MANY entrepreneurs who owe back taxes to the IRS, because they have failed to adequately plan for this.

One of the simplest things you can do to prepare yourself for tax time is to always save for taxes each time you pay yourself. You will be taxed on any income you earn from your business, as well as any profits that you make over the course of the year. Chances are good that you will have write-offs against at least a portion of your profits, and a good CPA can help you prepare for that. The part you CAN control with more predictability are the taxes you will need to pay on the money you have paid yourself as income.

When determining how much to save for taxes you need to first understand what you need to be withholding for. First are are your federal income taxes. This will be determined based upon how much money you pay yourself over the course of the year. Use this link (https://www.forbes.com/sites/kellyphillipserb/2018/03/07/new-irs-announces-2018-tax-rates-standard-deductions-exemption-amounts-and-more/#717401e3133d) to determine the federal tax bracket you will fall into (now that you know how much you will be taking in paychecks this part is easy!).

Next you want to determine how much you need to withhold for your state income tax. You can determine this by doing a quick google search for your states income tax brackets. It will give you an idea of how much you need to withhold (most states are probably 3-10%).

The third thing you need to think about when determining how much to save for taxes is self-employment tax. This is the same for everyone and is 15.3% of your income (up to $128,400). Self-employment tax is a combination of social security and medicare taxes. Usually an employer will pay half and the employee pays the other half. As an entrepreneur you are both, so are responsible for paying in the entire 15.3%.

So let’s say that you estimate you will pay in 25% Federal, 4% State and 15.3% Self-employment taxes (a total of 44.3%). This means that for each paycheck you take out you will want to take 44.3% or your paycheck amount and put it into a tax savings account. This way, when tax time comes, you already have the money sitting in your account, ready to pay your taxes when they are due. Some accountants may want you to pay in monthly or quarterly taxes, to ensure you are staying on track, so talk to your CPA to see what is going to make the most sense for you. Putting this money aside with every paycheck will ensure that you are well prepared when tax time rolls around and you won’t have to dread seeing your accountant!

Want help navigating this? That’s what I do! I work with individuals, couples and entrepreneurs to help them stress LESS about money and teach them to use their money to live the life they dream of! I am happy to help you streamline your personal and business expenses and if you are ready to stop stressing about money I’m here to help! You can read more about me and what I do at www.jillemanuel.com!