How to pay yourself as a self employed person
Part I: On the how
Have you experienced frustration with Intuit and its services? (TurboTax, Credit Karma, QuickBooks, or Mailchimp) Or maybe you've heard about their decades-long work against making tax filing free and easy? — in other news. . .I am now Xero certified! I am so excited to share this as I unravel and remove more and more of myself from the Intuit ecosystem. Pretty sure they are related to satan and the more I learn, the less I like them.
If you are beyond a solopreneur and are a corp, you should get on payroll. If you have been wanting to set this up but don’t know how or need support, I can help set you up in payroll and get you paying yourself a reasonable salary. Of course, there needs to be income and of course, it depends on how you are structured.
So let’s get into it!
How Should You Pay Yourself as a Self-Employed Person?
If you’ve graduated beyond being a solopreneur and formed a corporation, it’s time to get on payroll. If you’ve been wanting to set this up but don’t know how or need support, I can help you establish payroll and ensure you’re paying yourself a reasonable salary. Of course, this requires income, and it all depends on your business structure.
So, let’s dive in!
If You Are a Sole Proprietor, You Should. . .
As a sole proprietor, the simplest way to pay yourself is through draws. This means you take money out of your business account as needed. There’s no official salary; just be sure to keep track of your income and expenses for tax purposes. This flexibility allows you to pay yourself what you need while still keeping the cash flow in check.
If You Are an S-Corp, You Should. . .
For S-corporations, the IRS requires you to pay yourself a reasonable salary. This means you should run payroll and issue yourself a W-2 at the end of the year. The key here is to strike a balance—pay yourself enough to cover living expenses but not so much that it raises red flags with the IRS. Also, any additional profits can be taken as distributions, which might have different tax implications.
If You Are an LLC, You Should. . .
LLCs can be a bit tricky since how you pay yourself can depend on whether you’ve elected to be taxed as a sole proprietor or an S-corp. If you’re a single-member LLC, you typically take draws like a sole proprietor. If you’ve opted for S-corp status, follow the S-corp guidelines outlined above.
Salary vs. Distributions
When it comes to compensation, remember the difference between salary and distributions. A salary is a regular paycheck that you must report as income, while distributions can be taken from the profits of the business and may not be subject to self-employment tax, depending on your structure.
So What Is a Reasonable Amount to Pay Yourself?
First off, it depends on your business’s profitability, your personal financial needs, and industry standards. A good rule of thumb is to pay yourself enough to cover your personal living expenses, but also consider the value you bring to your business. If you’re unsure what that number looks like, I can help you analyze your financials to determine a reasonable salary.
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Written under a Libra sun and a Cancer moon feeling free.
In October’s Dear Serah for paid subbies
Detailed guidance tailored to your specific situation, access my exclusive resources and step-by-step payroll setup. Don’t leave your financial future to chance—let’s get you on the right track!
For Locals to Humboldt::
I will be speaking next Wednesday from 8:30-10am at the Business for Breakfast in Arcata on Navigating Business Finances for Sustainable Business Success. It is free for Chamber members and $5.00 for all other local businesses. Here is the link to register.