Learn how to pay yourself consistently as a business owner and which method of payment is best for you. With these tips, you can ensure your hard work pays off with consistent, timely personal income.
One of the scariest parts of making the leap to owning your own business is thinking about the money and how to pay yourself consistently as a business owner. Working for yourself means going from a consistent paycheck to what is usually an inconsistent income. It’s often what is most scary and frustrating for independent business owners, as you probably know.
I started my business five and a half years ago, and have been working for myself full-time for almost three. I was so nervous about quitting my day job because my husband and I had just bought a house, and he was only working part-time then.
Thankfully, I’ve been able to pay myself consistently every single month since working for myself full-time. Being able to pay yourself consistently is easier when treating your business like a business, and not a hobby, and setting up a system. So, I want to help you stress less about your finances, and teach you how you can pay yourself consistently!
Methods to pay yourself as a business owner
Before we get into how you can pay yourself, it’s important to know the different ways you can pay yourself and the implications for each one:
- Owner salary – You can pay yourself a salary just like you would get paid when working for a company. This is a more consistent, stable option, and you’ll also have taxes taken out with each paycheck, making your tax bill easier to manage.
- Owner’s draw – You can take money out of your business as needed, up to the total amount you put into the business (your owner’s equity). This option is more flexible so you can ensure you’re adjusting your pay based on your business profit. But, you’ll need to set aside taxes yourself to make tax time a little easier.
Unfortunately, you can’t just choose one or the other. Your business structure affects which option you can use for your owner’s pay. If you own an S-Corporation or a C-Corporation, you’re legally required to take an owner’s salary. The IRS also has a hand in setting that salary, since they have to ensure that your salary is reasonably comparable to others in the same field.
If you’re a sole proprietor, partnership, or LLC, you can take an owner’s draw. Most independent businesses fall in this category (like me!), so it’s important to make sure you’re setting yourself up for reliable, consistent pay.
Ensure your necessary business income
I know you’ve read the blogs and attended the webinars about creating a pricing strategy. Well, they’re all correct – you have to price yourself correctly.
I was way under-pricing myself the first year and a half of working for myself, but setting the right pricing strategy allowed me to improve my cash flow and sure I could pay myself consistently.
One great tip for establishing pricing is to start with your ideal income. How much do you need to make to cover operating and business expenses? How much do you want to be able to pay yourself a salary? From there, consider your target profit.
Now, use the following equation while considering the average number of projects you work on each month:
Ideal Income / Number of Projects Per Month = Profit Per Project
Some simple math can help you determine your pricing range. I also recommend working with a pricing expert or a business accountant who can help you develop a goal income as well as a successful pricing strategy that helps you meet that income consistently.
Offer different payment methods and payment plans
Payment plans can make your services more accessible to everyone and ensure consistent cash flow for months at a time.
Because a majority of my services are over $1,000, I offer payment plans. I know many entrepreneurs who will bump the price up a bit when doing payment plans, but I do not. I think it’s all about your personal preference and how you like to do business, whether or not you want to add some “fees” to a payment plan.
My payment plans (and ones that I’ve seen from other people as well), all have the final payment due before the project ends, or on the final day. When you set up a payment plan through HoneyBook, you can build automatic payment reminders to ensure your clients know when a recurring payment is coming up.
In addition to payment plans, it’s especially important to offer multiple payment methods, like ACH and credit cards. Typically, when you offer online payment methods it’s easier to get your invoices paid when they’re due and you won’t have to worry about waiting around for a check.
More consistent cash flow = more consistent paydays for you!
Make sure you’re using business accounts
Before I even took the leap to a full-time business owner, I had a separate bank account for my business. Each month, I pay myself on the 15th and 30th, just like my day jobs would pay me. Having a separate bank account is super smart for taxes, but also for paying yourself.
If you mix your personal expenses and other income with your business, it could cause a huge headache for tax time. There can also be legal implications, which we don’t have to get into now. But a word to the wise: make sure your business entity has its own bank account!
Maintain consistency to give yourself the pay you deserve
Regardless of what I make each month, I pay myself the same amount each month. All the other income stays in my business bank account. This makes it less stressful for me in slower months, for quarterly tax payments, and if I want to invest in a course, a coach, etc.
When it comes to paying yourself consistently, it really boils down to systematizing it. Through your advertising and marketing efforts, you should aim for a specific amount of clients each month that you can then turn into long-term cash flow with payment plans or recurring business.