Have you ever had times when you felt like something should be more complicated than it actually is? I see this a lot when it comes to bookkeeping and thoughts around business finances. Many people are worried they’re going to “break” something when using QuickBooks, so they freeze and do nothing, thinking it should be more complex than what they’re doing. The truth is, 90% of the people I meet and work with are doing better than they think. Hopefully, that gives you a little bit of encouragement.
Today’s topic is one of those things that people often assume should be more complicated than it is—how to pay yourself as a business owner. Not what to pay yourself, but the literal steps to actually give yourself a paycheck. This is a question I get often, especially from business owners who let all their cash sit in the business bank account because they’re afraid they’ll do it wrong. They’re unsure how to pay themselves, so they just avoid it altogether. One of my clients even told me that her husband started to get frustrated because, although the business was making money, none of it was showing up in their personal finances. She simply didn’t know how to pay herself, so she let it all sit in the business account, untouched.
If any of that sounds familiar, let’s walk through the steps of how to pay yourself a paycheck.
The first thing to understand is: it depends on your business structure.
As you’ve probably heard before, it really does depend. If you’re a sole proprietor—meaning you haven’t legally filed anything for your business and are operating under your own name or Social Security Number—or if you have an LLC, the process is very simple. With both of these, you can also apply for an EIN (Employer Identification Number) if needed, like if you’re working with contractors, but that piece doesn’t change the structure itself.
If you’re a sole proprietor or an LLC, all you have to do is transfer money from your business bank account to your personal bank account. That’s it. It really can be that easy.
That said, here are some best practices
- Set a schedule for paying yourself. Whether it’s once a month (e.g., on the 1st or 15th), or every Friday—whatever works for you. Consistency is key.
- Try and pay yourself the same amount each time. You can always give yourself a little bonus now and then, but a consistent paycheck is better for tax purposes. It’s something both the IRS and tax professionals prefer.
If you’re unsure how much you can actually afford to pay yourself, check out my mini-course, Get Comfy With Budgeting. In it, we walk through how to figure out that number so you can feel confident that you’re covering your taxes, your business expenses, your investments, and your own paycheck.
Another important point: you need to categorize your payments correctly.
If you’re a sole proprietor or LLC, your transfers to yourself should be categorized as equity in your books. You won’t see this on your Profit & Loss statement because it’s not considered a true business expense. The IRS looks at your total income minus business expenses to determine taxable income, even if you don’t pay all of that money to yourself. So it’s important to know how to record those transfers properly. If you need help with this, my program Get Comfy With QuickBooks walks you through the exact steps for how to do it in QuickBooks.
Now, if you’re not a sole proprietor or LLC—if you’re an S-Corp—things are a little different. This is where that exception comes in. S-Corp owners need to run payroll through a processor like QuickBooks Payroll, Gusto, or even ADP if you have multiple employees. Your paycheck would be a true business expense, which is a bonus because it lowers your taxable income. A tax professional can help you determine if an S-Corp structure is right for you. Just know it’s not as simple as a bank transfer in this case.
I hope this helps clarify how to pay yourself as a business owner. I definitely want you to be paying yourself! If you’re someone who’s been storing money in your business account out of fear or uncertainty, it’s time to make a plan. Let’s get you set up to enjoy the fruits of your hard work.
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