#4: CHOOSE A WAY TO HANDLE PAY

Today’s episode is all about paying yourself in your business. If you’re a business owner or an aspiring entrepreneur, it’s likely you have questions about this topic. I’ll address how to pay yourself depending on your business entity, how much to pay yourself, and how to set up a system to pay yourself.

I recommend ADP for payroll and use it myself in my business!
http://accountantprogram.adp.com/accept/?EID=5453c160-167e-4c6b-aedc-893d78fb3f87&type=ShareUrl 

Gusto is also a great payroll platform for your business!
https://gusto.com/r/leslie4559    

I also have a free checklist for new entrepreneurs who are just getting started with their small business. Also, tune into my first podcast episode about starting smart in business. It breaks down the 5 Key Decisions/Actions that new entrepreneurs need to think about.
https://www.financiallyadjusted.com/startsmart

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Disclaimer: This content is for educational and informational purposes only. Please consult with an accounting professional for direct advice based on your specific business situation.

Transcript

Hello there entrepreneurial friends. Welcome back! I'm Leslie Roth and you're listening to Financially Adjusted. This is a podcast bringing you all kinds of informational nuggets about your small business finances. On a side note, I have an adorable little chihuahua shih tzu mix named Gus, but we also call him Nugget because he's nugget sized. He's a thirteen pounder. So anytime I hear or say the word nugget I can't help but think in my head “awww Nugget”. It makes me think of my cute little fur baby. Anywho, I am so happy you're here today. The topic we'll be discussing is one that I get a ton of questions on, and I found that there's quite a bit of confusion around this topic if you're new to the business world and sometimes even people that have been doing this for years are confused about it. We've touched on this topic a little bit before in prior episodes but we're going to dive a little bit deeper today.

We're going to be touching on three different topics when it comes to paying yourself and your business. We're going to talk, number one, about understanding how you need to pay yourself depending on your entity type. And the second thing we're going to discuss is how much do you pay yourself. And the third thing that we'll discuss is setting up a system for paying yourself. This episode is really for anyone in business. If you're brand new to the business world you might be learning for the first time or if you're someone who's been in business for a while, you might need to gain a better understanding of how to better your current system or verify that you're doing it the right way. So, let's just dive in.

First off, we're going to talk about understanding how you need to pay yourself. If you're an LLC or a sole proprietor, meaning you formed an LLC with one person or you're operating under your Social Security number, you're just simply going to be transferring money from your business account to your personal account. And this is called an owner's draw. So, it's pretty straightforward. If you're an S corporation, you are required by the IRS to pay yourself as a W2 employee. And that needs to be a reasonable salary based on the fair market wages for what you're doing in your business. I highly highly recommend speaking to a good tax pro immediately regarding a reasonable salary if this is you and you haven't done this yet. You'll pay yourself a regular paycheck with payroll taxes taken out of it just like you would if you were working for somebody else as an employee.

You can also take an owner's draw, or shareholder distribution, which is what it's called when you're an S corporation. It’s super important that you do pay yourself as a W2 employee since that is a requirement by the IRS and that is something you don’t want to get in trouble for not doing. Your tax pro should definitely be consulted when it comes to verifying the proper amount to take in distributions as well as how much your reasonable salary should be. And just to clarify, a distribution is going to be just like a draw. It's going to be money just taken out of your net profit that you can take from the business 

The second thing we're going to talk about today is determining how much to pay yourself. This is often a question that I get - how much should people take from the business and ultimately, that depends on where you're at in your business and how profitable you are how much you can really justify taking in total. Now as far as the reasonable salary you want to make sure that you have enough to pay yourself a reasonable salary So, if you're an S corporation, I just mentioned that the major benefit of having an S corporation is to save money in payroll taxes because if you are just a  solo prop or LLC, you will pay self-employment taxes on your net profit. So, you're going to pay a little bit more in taxes on what's left over. If you're an S corporation, you’re having those regular payroll taxes taken out already out of your salary. And then you'll still end up paying money on your net profit or I'm sorry Taxes on your net profit; however, you won't pay self-employment taxes, so you are saving a little bit of money. And that's something that your tax pro should be able to break down for you. So, if they're helping you determine whether or not you should become an S corporation, they should really be doing a calculation based on a lot of different factors and be able to prove that you are in fact going to save money by doing that. There are extra admin costs with being an S corporation and additional payroll costs, so you want to make sure that you're definitely reaping the benefits of that election.

So, when you're determining how many distributions or how much in distributions you can take on top of your S Corporation salary, you can have your tax pro help you with that and make sure you're not going to be taking too much. So really, you're going to want to look at your net profit andwhere you're at in your business. If you have a bunch of debt that you're trying to pay off or you're  in the process of building up an emergency fund and operating fund and operating cushion, you probably are going to want to take less for a little bit until you reach those goals and then you can start to justify taking more out of that net profit. If you know you're going to have a goal of needing to buy a big piece of equipment and you want to pay cash for that, you should probably forecast and look ahead to see what's coming up on the horizon of your business and take that into consideration. I think it's nice when you can set a recurring monthly amount that you could possibly take in distributions. What makes that nice is on the personal side of things when you're forecasting out your personal budget and your personal goals, you can use that number to project forward to reach those personal goals. For LLCs and sole proprietors, I advise to do this same thing as far as setting up a recurring amount each month if it's possible for you. I know it's hard with some businesses when you're starting out and also when you have a very variable situation with your revenue every month. But it's important to know first you know what you can afford to pay yourself in your business and then determine your budget on the personal side of things. A very important piece of advice around this topic that I'd like to give you is - you'll think of a broken record really if you listen to me long enough - but I cannot stress this enough. Do not mix your personal expenses with business. I see a lot of business owners doing this where they aren't sure of the lump sum amount that they should take each month that they just run their personal expenses through the business and that is something you want to steer away from for many many reasons. You'll make your bookkeeping very confusing and you're going to negate the legal protections that you have if you have an LLC because by running all your personal expenses through your LLC or your S Corporation you're going to be piercing that corporate veil. So, it's best business practice to pay yourself via a transfer which is predetermined lump sum of money that you transfer into your personal account, and then your personal expenses will go through your personal accounts. And on occasion it's just going to happen that things are accidentally comingled aybe like you're out and about and you don't have your business card but you want to get something for your business to use your personal funds or vice versa. And that's okay if it's a couple times here and there. Not a huge deal. You can categorize that appropriately as an owner's draw and owner's contribution for that expense but in general, just get into the habit of keeping those completely separate.

As far as a recurring amount that you're paying yourself, it's easier to determine a recurring amount when you have recurring steady income and expenses but that's not going to be the case of course for many businesses, especially in the beginning. So, when you're at those beginning stages, it's less likely that you're going to take home as much of your revenue, but that is going to change over time and it's something you're always going to be revisiting and reassessing in your business as it grows and changes. A common misconception regarding paying yourself is how the taxes work around this. And I think there's a lot of confusion around what you do or don't pay taxes on. Some people won't take a lot of money out of their business thinking that they won't have to pay as many taxes but that's simply not the case. What you pay taxes on is what your net profit is on your income statement. So even if you took that money, or you left it in the business you're still paying taxes on that net income.

If you're an S corporation, you'll have payroll taxes coming out of your check just like you would if you're a regular employee, but you'll also end up owing personal income taxes on what your net profit is. Businesses aren't actually the ones who owe the tax. It's technically personal income tax.

LLC's and S Corp proprietors it's all the same thing. They're called pass through entities because that tax liability passes through to the person who owns the business. So, just remember that and make sure you're setting aside like twenty five percent of your net profit each month so that you have that ready to go when you pay your estimated taxes or when they come due at tax time.

The third and last thing we're going to talk about today when it comes to paying yourself is setting up a system. So if you are an LLC sole prop and you're just doing these transfers and you know each month I can take the same amount you can set up an automatic transfer from your business to your personal account once a month …twice a month.. however you want to do that and…you can kind of streamline that and make it efficient. S corporations…This is going to be a bit more involved because you are paying yourself as a W2 employee. You're going to want to get hooked up with a payroll processing company so that you can get the ball rolling on paying yourself a salary. If you've been paying W2 employees it's likely you already have a payroll processing company that's helping you do that and you have that system set up. All you need to do is just add yourself to it. If you do not then you need to find payroll processing company or you could do it yourself but it can get a little complicated with remembering the different  tax due dates and also you are setting yourself up for errors if you're not super comfortable with it So I just highly advise finding a professional to do this for you. Some tax professionals or accounting firms they will be able to do that for you. And file taxes for you and everything. My advice is to just not have one person doing it because typically that's a single point of failure So if that person is not available, and something happens that they can't run your payroll and you don't know how to do it, then that's going to cause some problems. So, in my business I use ADP and I love them It's streamlined, efficient, and easy. They have a dashboard that's easy to use so I will recommend ADP to my clients and Gusto is also a payroll company I recommend. The key is to stay in compliance with your payroll tax filings which can be monthly, bimonthly, biweekly, quarterly, annual. It just depends on the tax we're talking about and each state can be a little different when it comes to that. But I personally think it's more beneficial if a company does it and you're not relying on just one person. So that's one of the biggest takeaways from all this. I also recommend steering away from having an in-house employee take care of it They'll be seeing what everyone gets paid and I think that that can cause problems and be a violation of privacy and can be a boundary issue in your organization.

Most payroll companies have a sign in that you'll use and you can go in run payroll and it's very easy to do. Now, you can outsource this task to an outsource bookkeeper if you have one. But typically it's very user friendly and you know they're doing all the tax filings for you and all of that you're really just plugging in hours for your employees and doing it in in the right time. So, you can do this yourself and it’s super easy if you. If you are only paying yourself as a W2 or you just have like one other employee and you're making your it's always the same amount, you can actually automate this. I know ADP does this and probably other payroll processing companies as well. But you can just have it set up just to be automatic whether it's every other week once a month and that can be very beneficial for your business. And that's one task that you take off your plate which is always great when you're business owner and you're swamped. So, I hope this episode helped you and helped to frame if you're doing the right thing in your business and what you need to do moving forward. 

I really hope this episode helped you to get an idea of how you should be paying yourself and hopefully validating that you are doing it correctly. But I think two of the biggest takeaways from this episode are to make sure you're not co-mingling your personal expenses with your business expenses; you always want to be sure that those are separate. So, you pay yourself a lump sum that's going into your personal bank account and that's where your personal expenses are coming through. And, if you're an S corporation, you want to make sure you’re paying yourself as a W2 employee.

I hope you have a wonderful rest of your day I'm so glad you joined me here today. Have a good one.

Disclaimer: This content is for educational and informational purposes only. Please consult with an accounting professional for direct advice based on your specific business situation.