Payday for the Owner

Ask anyone on your payroll when they get paid next and they'll tell you the date. Ask a lot of owners the same question and you'll get a laugh.

Most owners pay themselves with whatever is left, whenever it's left. It feels responsible, because the business comes first. But it means the person carrying all the risk is the only one who doesn't know what they'll earn this month.

It also hides something. If the business can only pay you when there happens to be money left over, you can't tell whether the business really works, or whether it only works because you aren't being paid.

Pick a day and an amount

Pick a pay day, once or twice a month, and an amount. Then pay yourself that amount on that day, every time. Start small if you have to. A small amount you can count on does more for you than a bigger one that shows up whenever.

If you built the 13-week forecast from Find Your Tightest Week, put your pay in it as its own line, the same way you put in payroll. You'll see weeks ahead whether it fits.

How you pay yourself depends on how the business is set up

If you're a sole proprietor, or an LLC taxed like one, you don't put yourself on payroll. You pay yourself with a draw, which just means moving money from the business account to your personal account. A draw isn't an expense. It doesn't lower your profit and it doesn't change your taxes, because you're taxed on the business's profit whether you take it out or leave it in. LLCs with more than one owner work in a similar way, with a few extra rules your CPA can walk you through.

If your business is an S corporation and you work in it, the rules change. The IRS expects you to pay yourself a reasonable salary through payroll, with taxes withheld like any other employee. Money you take on top of that salary is a distribution.

The S corp question

Most owners ask about S corps because of payroll taxes. As a sole proprietor, you pay self-employment tax on your profit, whether you take it out or not. As an S corporation, you pay payroll taxes on your salary, but not on distributions.

An S corp also costs money to run: a payroll service, a separate tax return and more bookkeeping. So it only pays off once your profit is high enough that the tax you save is more than what it costs to run. That point is different for every business.

I built a free calculator that works it out for you: the S Corp Breakeven Calculator. It runs on your own screen and collects nothing.

Try It: Your First Payday

1. Pick your pay day and put it on your calendar as a repeating event. The 1st and the 15th, or the last Friday of the month, whatever you'll stick to.
2. Pick your amount. Look at the last three months. For each one, take what came into the business and subtract what went out, not counting anything you paid yourself. Start with an amount no bigger than the smallest of the three.
3. If you're wondering about an S corp, run your numbers through the calculator. Take the answer to your CPA as a question, not a decision.