Many entrepreneurs start their business from the ground up so there are no investors, no board of directors, and no one giving you a paycheck. The business owner determines how much their pay is going to be and far too many decide on $0.
Your business should be something that your passionate about, but it’s important to realize that passion only goes so far. If you are putting all your time and energy into your business, but not getting anything back then burnout is likely not far behind.
Paying yourself is an important aspect of being an entrepreneur that often gets overlooked. But it doesn’t have to be that way! You don’t have to be a martyr for your business. Here are a few things to know so you can start bringing home the bacon.
Why
Your business is your job. You would be paid for your efforts if you had a traditional job, and you should be paid for your efforts as an entrepreneur. What do we call a job that you don’t get paid for? A hobby. Your business is not a hobby and you deserve to get paid for all the work that you do.
In addition to simply deserving to get paid, the IRS wants you to pay yourself. They require that business owners pay themselves a “reasonable compensation”. What is reasonable depends on your industry and location. A business consultant in NYC would typically make more than someone doing the same work in a more rural area.
I highly doubt you started a business thinking that you’d be working for free, so it’s important to value yourself enough to take a paycheck.
How
In order to pay yourself you must know two things; how much your business is making and how much you need personally. In the beginning of your business you may only be able to pay yourself the bare minimum. As the business grows, the pay you can draw will also grow.
So the first step is a solid foundation of bookkeeping in your business so you can determine your profit. It is impossible to know how much to pay yourself unless you can first figure out how much your business is bringing in and what your expenses are. Be sure to plan for any upcoming large or irregular expenses like taxes.
The second step is to determine what your value is. You will obviously need to cover your personal bills and expenses. That’s just the basics. You will need to have a long talk with yourself to really figure out how much your time is worth. What is fair market value for your skills?
Once you have those pieces of information, you will be able to set a pay schedule for yourself. Don’t fall into the trap of taking out small amounts just whenever you need them. Set a specific day and amount that you pay yourself, whether it’s weekly/bi-weekly/monthly, and stick to it. Your time is valuable and you deserve to be compensated for your hard work.
**Keep in mind that how you pay yourself is also dictated by how your business is set-up. An LLC or sole proprietor can take an owners draw, but the owner of an S corp has to take a paycheck in order to be IRS compliant. Be sure to discuss your options and requirements with your CPA if you are unsure about the process of paying yourself.
When
Immediately or as soon as possible! Obviously you won’t be able to take a salary if your business isn’t bringing in any revenue at all, but as soon as that first customer invoice is paid, you should already know what your cut will be.
If you have been in business for years and still are not able to pay yourself, then you need to take a hard look at why that is. It’s possible that something in your business model just isn’t working and needs to be changed.
As I said before, the early stages of a business will probably be lean times. You may only be able to pay yourself enough to squeak by. This should change as soon as the business starts to grow.
You have big goals for your business and you are the one that will make them happen. You put in the work and should absolutely be paid for it. Value yourself and your efforts. Take the time to figure out what your pay should be, then take it!
Is sloppy bookkeeping stopping you from getting paid? It might be time to hire a professional. I can help you get caught up and learn to use your financial information to reach your goals and grow your business.
Contact me today to see if a virtual bookkeeper is right for you.