Paying Yourself as a Sole Proprietor
Being your own boss can be an exciting venture, but it is not an easy task. There are a lot of questions you may have about the process, especially when it comes to finances.
One of the biggest questions new business owners may face about money is how to pay themselves. Unlike owners of corporations who often receive a salary through payroll, sole proprietors generally pay themselves by taking money directly from the business’s profits.
This can be a difficult situation to sort out on your own. How exactly do you pay yourself and how much money should you give yourself?
Use an Owner’s Draw
A sole proprietor typically pays themselves through an owner’s draw. This means transferring money from the business account to a personal account whenever needed. Since the business and the owner are considered the same legal entity, these withdrawals are not treated as wages.
You can take a draw by:
- Writing a check from your business account to yourself.
- Transferring funds electronically from your business account to your personal account.
- Taking withdrawals on a regular schedule, such as weekly or monthly.
Keep in mind that you pay taxes on your business’s net profit, regardless of how much money you withdraw. As a sole proprietor, you generally must pay federal income taxes, state income taxes, and self-employment taxes for Social Security and Medicare.
Determine How Much to Pay Yourself
The amount you pay yourself depends on several factors, including:
- Your personal living expenses
- The profitability of your business
- Future business expenses and cash flow needs
Many new business owners choose one of two approaches:
- Pay themselves only enough to cover essential living expenses until the business becomes profitable.
- Pay themselves what they would earn in a similar position in the marketplace if the business can support it.
As profits grow, you can increase your draws.
Project Your Business Profits
Before deciding how much to withdraw, it’s important to have a clear understanding of your business’s finances. Estimate your expected income and expenses and review your cash flow regularly.
To make this easier:
- Keep accurate financial records.
- Separate business and personal finances.
- Maintain a dedicated business bank account.
- Use accounting software to track income, expenses, and owner withdrawals.
Keep Business and Personal Finances Separate
Even though a sole proprietorship is not a separate legal entity, maintaining separate finances can simplify bookkeeping and tax preparation. Consider:
- Opening a business checking account.
- Using a separate business credit card.
- Filing a “doing business as” (DBA) name if you want to operate under a name other than your own.
Learn More About Sole Proprietorships
Paying yourself as a sole proprietor is generally straightforward. The key is to balance your personal financial needs with the financial health of your business.
Paying yourself accurately is easier with the right legal help. Orlando corporate lawyer B.F. Godfrey from Godfrey Legal can assist you with all your legal concerns. Contact us today to get the help you need to run your business smoothly. To schedule a consultation, call (407) 890-0023 or fill out the online form.
Source:
nerdwallet.com/business/software/learn/how-to-pay-yourself-sole-proprietorship
