I set up a business account. How the f*ck do I pay myself?Jul 04, 2023
If you've followed me for any amount of time, you've heard me talk about the importance of having a separate bank account (I really like Novo) for your business.
It's absolutely crucial to staying organized, reducing tax stress, and having a handle on your finances.
But opening that account can also result in more questions.
Specifically, how the f*ck do I pay myself?
Let me first say...it's common to feel uncertain about how to pay yourself when you are the business. After all, you're not receiving a regular paycheck from an employer - you are the employer. It's confusing to know how much to pay yourself, when to pay yourself, and then how to actually pay yourself. But with a few guidelines and a little planning, you can set up a solid system.
You can't figure out how much to pay yourself without figuring out a few other things first.
Let's break it down
The first step is to take a look at your average monthly business expenses. This includes any costs associated with running your business, such as rent, equipment, supplies, and other operational expenses. Consider this as a percentage of your total income to get an idea of how much of your earnings will go towards keeping your business running.
Next, you'll want to set aside money for taxes. There are two ways you can figure out how much to set aside for taxes. You could go the easy route and be conservative in your estimate by choosing a high percentage, like 30%. Or you could work with your advisor or tax professional to run a tax projection to get a more accurate number. The key is to set aside enough so that you won't have any big surprises come tax season.
In addition to taxes, it's also important to save money regularly. This could be for personal reasons, such as building an emergency fund, or for business reasons, such as investing in new equipment or hiring an employee. Again, consider this as a percentage of your total income to get an idea of how much you should be setting aside.
Once you've factored in your expenses, taxes, and savings, you can determine what percentage of your income should be allocated to owner's compensation. This is the amount of money you'll be paying yourself after everything else has been taken care of.
Let's look at example
For this example, you earn $10,000 in a month. Your business expenses are $1,200, so that's 12% of your income. You've decided to set aside 20% of your income for taxes, which comes out to $2,000. You've also decided to save 10% of your income, or $1,000. That leaves you with $5,800 for owner's compensation.
Now that you know how much you should be paying yourself, the next step is to actually do it. The easiest way to pay yourself is to set up your business bank account to link to your personal account. This way, you can transfer money from your business account to your personal account as needed. You can send your owner's compensation to your personal checking and your savings to your savings and/or investment accounts.
Finally, you'll want to establish a schedule for paying yourself. Depending on your preference, this could be weekly, bi-weekly, or monthly. Whatever schedule you choose, make sure to stick to it consistently. This will help you stay on top of your finances and ensure that you're paying yourself regularly and fairly.
I know this process can seem complex but there's a way to make it easier. There's a reason I mentioned Novo at the beginning of this email. It's one of my favorite tools to help keep your business finances in order. Let me tell you why...
Novo allows you to set up reserve accounts within your bank account (basically accounts within the account). You then choose what percentage of the money you earn will go to each reserve.
So if we take the above example, we would have the primary account plus 3 reserves.
The first reserve is for taxes (20%).
The second reserve is for savings (10%).
The final reserve is your owner's compensation (58%).
The primary account is where you would pay your business expenses (12%). If you paid for something with your debit card, they would come from here.
Now every time a client pays you, your money is automatically given a job. Plus if you increase your rates, your savings, tax savings, and owner's comp will automatically increase because they are percentage based rather than specific dollar amounts.