How To Pay Yourself When Self-Employed

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When you’re self-employed you probably want to get paid.

So you think you should pay yourself.

At least a little somethin’, amirite?

You are the business owner after all!

I mean, you do have bills to pay.

Unless you live with family or are taken care of I guess!

But let’s stay on point here lol.

How do most people take money out of their business for personal expenses?

By writing a check and taking it to your financial institution to deposit.

Or doing a mobile deposit.

Or simply transferring money whenever they need it.

Some people I have worked with have made transfers as many as 3-4 times a week.

That is a horrible way to pay yourself no matter how you look at it, but not uncommon.

Why?

Because, just like anything else, there is a right way and a wrong way to get money out of the business to take care of personal expenses.

And just to be clear, when I say “pay yourself” I’m using that to describe the act of taking money out of your business to use for personal purposes.

Pay yourself from your phone while lounging

The Problem With Taking Money From A Business

The money that comes into a business is meant to be used strictly for business purposes.

That means it can only be used for paying for:

  • supplies
  • business rent
  • running payroll
  • marketing costs
  • your business website & all its related costs
  • and anything directly related to the operation of the business.

That money is not to be used to pay for your:

If you work from home, you can take a reasonable portion of certain household expenses such as phone, power, cable television & internet, or auto-related outlays.

Sometimes, however, it is necessary to take money out of the business in order to cover some personal expenses…

A self-employed person taking money out of a cash register-the wrong way to pay yourself.
Simply taking money out of your business to pay for personal expenses anytime you need isn’t the best way to pay yourself

The Wrong Way To Pay Yourself

Lots of people who own small businesses don’t know how to properly handle the task of taking money out of the business.

Unfortunately, many also don’t feel like they need to work with a tax accountant because they can “Google what they need to know”.

They simply make payments for their personal expenses out of the business bank account or use the business credit card for those personal expenses.

Some even head over to the ATM machine and take cash out of the business for no other reason than to have some pocket cash.

None of those methods are even close to proper.

Another thing I’ve been hearing as of late is incorrect advice for sole proprietors and single-member limited liability company (SMLLC) members, or the partnership partners to sign up with a payroll service and take a salary.

While in theory that’s a sensible option and helps to alleviate the headaches of paying self-employment tax each quarter, it’s not permitted.

A sole proprietor can have employees but they cannot be employees.

If anyone recommends that you pay yourself by putting yourself on salary as either a partner (of a traditional partnership without S Corporation status) or a sole proprietor you should ignore them and seek advice elsewhere!

A woman at the bank teller window taking money from her business account instead of paying yourself
Going to the bank to withdraw money from the business account anytime you want isn’t the best way to get money for personal needs.

The Correct Way(s) To Pay Yourself

Let’s face it, starting a business wasn’t done just to put in work and get no reward.

You want to get paid for your time and effort.

If you need to access money for personal reasons, there are three acceptable methods for doing so:

  1. Putting yourself on salary and taking payroll checks (if an S-Corp)
  2. Writing a check to yourself in the form of a distribution (again, if an S-Corp)
  3. Schedule regular draws (if you’re a sole prop or Single-Member LLC) instead of random withdrawals

You should always create some sort of separation between business and personal expenses, and taking either of these steps does so without drawing any unnecessary attention to the transactions.

Setting yourself up with regular payments, even if they aren’t actual “salary” checks helps not only keep the business looking legit, but it also helps people budget better because it simulates a regular salary like before they took on the entrepreneurial venture.

It also creates a paper trail, which keeps you in a good position if/when it comes to…

Getting In Trouble By Not Paying Yourself Properly

How to pay yourself-Black man writing a check from his business account to mobile deposit into a personal bank account.
It’s so simple to set up a system to pay yourself the “right ways” that you won’t have to worry if you happen to get contacted by the IRS or state.

So what’s the worst thing that can happen if you don’t keep your business and personal money and expenses separate?

If you continue to treat your business as your personal piggy bank?

Bottom line is that if you are ever looked at for any reason by the IRS, a whole lot actually.

The first that that would happen is that you would have to undergo an audit, during which the burden would lie on your shoulders to prove that the expenses in question are valid business expenses.

It is your responsibility to show proof in the form of receipts or invoices that can support your claims.

If you cannot, then the fun really begins.

If you happen to be a C-Corporation, then the tax return would be recalculated with all of the expenses added back.

What makes this particularly troublesome is that C-Corps can be taxed at higher rates than individuals.

Not only that but you will be assessed interest and penalties on the unpaid portion of the newly calculated tax liability.

If the business is a partnership or an S-Corporation, the expenses will still be added back to the tax return, but it gets a little dicier from there.

Since those business formats flow through to the personal income tax return, you not only have to have your individual return recalculated but the additional income may in fact cause you to be phased out from deductions and/or credits that were originally claimed.

Let’s also keep in mind that if you have a state income tax, your state return will be affected too.

From there, your new income tax liability will be computed and you will again be charged penalties and interest on the unpaid portion of this new figure.

Additionally, you will now be on the IRS’s radar and the chance for future review and audits will increase.

On top of that, if you needed to raid the business accounts to support your personal lifestyle, then you will be in even greater trouble once the interest and penalties start piling on.

“How Much Should I Pay Myself?”

Hundred dollar bills and the 31st on a calendar circled in purple marker with "Pay Day" written as a reminder to pay yourself.
One of the best ways to take money out of your small business is to set a schedule and pay yourself a set amount at regular times.

This is something I get asked regularly:

Hey Eric, I’m newly self-employed, can you tell me or help me to figure out how much I should pay myself?

Dozens of entrepreneurs

It’s not a bad question.

In fact, it’s a sign that they are thinking about things in the right way.

The answer, however, is difficult to come by.

It’s like most things in life, the answer is: it depends.

Everyone has a different circumstance and family situation to consider when coming up with a figure to pay yourself.

Another thing that factors into the equation is whether the business is profitable or not.

Obviously, if your business is losing money, you can’t pay yourself.

The best way I have found to answer the question of “how much should I pay myself” is to do this:

  • Come up with a personal monthly budget
  • Figure out how much in total you will need to pay yourself in order to meet the budget
  • Divide that number in half
  • Pay yourself one half on the 15th of the month
  • Pay yourself the 2nd half on the last day of the month

This essentially acts like a regular paycheck which makes it easier to maintain a budget.

If, however, you can’t pay yourself that amount in full, then simply pay what you can.

The point of this exercise is to make it so that you aren’t constantly dipping into your business money to pay for your personal expenses.

So now you know the answer to the question “How much should I pay myself?” should you be wondering?

Wrapping Up

Well, that’s the basics on how to pay yourself as a self-employed “boss”.

Granted, no one article can ever address everyone but this should help the majority of you.

Keep in mind 2 things:

  1. Nothing is written in stone–you can schedule it however and use any dollar figure you wish.
  2. These aren’t “rules” or “laws” just guides to help keep you out of potential trouble and make it easier to manage your business plus your money.

I urge you to adjust these guides to suit your own individual situation.

And one last thing:

A BUSINESS IS NOT YOUR PERSONAL PIGGY BANK!

Your Turn

How do you pay yourself as a self-employed person? Do you just take money out of the business account whenever you feel like it? Do you have a schedule? Do you leave the money in the business account and simply pay yourself whenever you want to bring that balance down?

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187 Comments

  1. What about for a small business where literally every dollar you make keeps the roof over your head and food in your mouth? I mean down to the cent. I am a home owner, self-employed who does Lyft & dog walking. I started an LLC and I am about to open a business bank account. However after reading, I realize every dollar I make pays for my mortgage, car, gas, food, pets, etc. I will have maybe $10 left a week. My self employed “business” funds the cost of living. I am attempting to save for a rental property investment in the future (goals).. but that down the lines and me putting $40 into savings a month isnt the best and hopefully I figure out how to do my taxes properly. I feel stuck, but I am sticking to my entrepreneurial spirit and pushing through

    1. Hey BM!

      You can absolutely take money out for living expenses, the key is to not use the business as your personal bank account. That means, don’t pay personal living expenses directly from the business funds and don’t take money 4 times a week either. You need to treat the business as a separate entity especially since you are doing an LLC which is a legally it’s own “living, breathing entity”.

      Simply do a budget and split it in two. then take half on the 15th and the other half on the last day of the month to simulate a paycheck. Also you have to remember that your taxes are based on the net income of the business before you move the money to your personal account–those personal transfers are not business deductions.

  2. Excellent information Eric. Thankyou. Turns out I’ve been doing exactly that, I made an LLC and got a business Bank account and then without having a real business income, I direct deposited from my employeed W-2 taxed income… so will I have to be taxed twice??

    1. As long as you don’t record your deposits as income you won’t be paying tax twice.

      But here’s a question–are you literally taking all of your W-2 paychecks and dumping them entirely into your business?

    2. Thankyou! Yes, I didn’t report any business income or expenses and I haven’t had any, besides (yes, all of) my W-2 paychecks and personal expenses. After reading this, I understand if I do begin business, it’s crucial to separate the finances. Considering it now, I’m grateful I did, because It will mean I can show a “history” if I’m looking to get a business loan or something.

  3. Hi Eric

    Here is my question…I have a friend who has sole prop llc. She uses her business account as a personal bank account which I understand is legal however, she has asked me to do her books and I have seen some questionable practices. It appears she spent quite a lot of money over several months and then there are a ton of reversals made through Square. The reversals total a lot of the personal expenses. I only have access to csv files from the bank and have no indication as the why these reversals were done. Some of these are one for one and they are totalling several thousands of dollars. First, it appears (and knowing this person) that money was spent, charges reversed and then cash pulled out of ATM or transferred out to a personal account. Is this illegal? It seems at the very least this could be considered fraud and theft. And do I need to report this type of behavior to someone?

    Thanks

    1. Thanks for reading!

      Unfortunately, it’s a very difficult situation to break down without having specifics. If you are uncomfortable I would simply say that you don’t think you have the capability to sort through everything and suggest they go to an actual accounting firm (assuming you aren’t an accountant). They will make your friend give them all of the relevant info then sit her down and face everything directly.

  4. So if some deposits money illegally appropriated into a business account then uses that money for personal expenses can the IRS charge the individual for the amounts used as personal income rather than it being business income?

    1. Hello Lina.

      If you have questions about legal issues, you should go speak to a lawyer. They are the only ones who can speak to those issues.

  5. Thanks for the article. Earlier this year I joined a small, growing truss manufacturing company to oversee the finances, administer benefits, etc. The business is set up as an S-Corp, split 50/50 between the President and his wife. The President actively works in the business and takes a bi-weekly salary and a regular distribution as well. His wife does not work at all nor takes a salary. Given the size of the compnay (approx. 25 employees, $5M in revenue per year) and the fact that he’d never employed a full-time accountant before, I fully expected some issues with personal expenses being intertwined in the business. I’ve since had conversations with the President, explaining that all non-business expenses should really not be run through the business accounts, but that if they are, I will properly classify them as distributions. However, I think he still mixes personal with business in the same trip to the store, then he never turns in the receipt and tells our accounting clerk that the whole bill was for shop/office supplies or tools, etc. I’ve warned him that without receipts, if the IRS were to audit our business it would be very hard to prove the business purpose of the expenses and many would probably be disallowed, resulting in additional tax/penalties. I also found out recently that when certain customers pay in cash (rather than the usual check or credit card), he’ll ask our accounting clerk to delete the sale out of our accounting system, and he’ll pocket the cash to avoid paying taxes on the job specific income. I’ve warned him that it’s a form of tax fraud and that the legal way to take money out of the business is through payroll or owner distributions.

    Ultimately, my question is this: I hold a CPA license and I’m concerned that in the unlikely chance we were selected for an audit, that my license would be in jeopardy for allowing these things to occur under my watch. What are your thoughts on this? Also, what else can I do to convince him of the benefits of separating business & personal and the importance of detailed record keeping?

    1. Hey Trent.

      Unfortunately I don’t have an answer regarding your license. However, I would seriously consider speaking to an attorney about what your legal responsibility would be, particularly if you are the one signing off on anything. Or you can contact your state’s CPA board and present them with the facts and see what their response would be.

      As for what more you can do–not much I’m afraid. All you can do is try to provide them with facts and rules and hope that they will be smart enough to listen to your guidance. Perhaps you can do some research into cases where the IRS actually audited a business then threw out deductions of personal expenses misguided or where they found unreported income and applied penalties and interest to show that it indeed a real possibility.

      If none of that works, then I think the only logical alternative would be to look for a new position if you don’t want to have any hand in the goings-on of that business.

      Best of luck!

  6. Hello Eric! This was a very great read and I’m young buck entering in the entrepreneurial world by opening up my own business and I had a huge sigh of relief, to find out that I’ve been on the right side of my expense. Would you have any possible references or resources I can learn more in-dept on this matter. I’ve pretty much became a regular visitor at my local library and I’m running out of Google searches terms lol. Anything will help, thanks.

    1. Hi eric,i m planning to open small business using 401K ROBS,can i write myself a check from c-corp for my personal expenses like mortgage,educational plan,or even pay credit card?
      Thanks.

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  8. I own a business and I’m guilty of sometimes using my business account for my personal needs and I owe money to the IRS which is what I’m dealing with now. However, I recently just opened up my personal account to start using after all this come up! Will it be bad for me once the IRS looks at everything to decide on a payment plan?

    1. Hello Sammie.

      There are no guarantees with the IRS, but most of the time you won’t get “looked at” on a detailed level like that for a payment plan. If, however, you were simply using the business money for personal stuff and classifying it as a draw/distribution, it will be less damaging than if you were treating personal costs as business expenses.

      If the latter is the case, I would seriously suggest you reach out to a tax attorney or CPA first to discuss your options including amending the past returns to reflect the proper classification of transactions.

  9. Great article, thank you. In my opinion what is even bigger risk than IRS issues (assuming business has cash flow and can pay IRS) is setting yourself up for personal liability. When doing an LLC, Corp, partnership, is to be protected by the corporate veil and keep personal and business separate like Mr. Nisall writes. If you as a business owner go to litigation with an employee, vendor, customer, partner, and their lawyer is any good they will push to be awarded a personal lien. If they can prove you use business for personal, personal for business, even occasionally, there is good chance they will request “pierce corporate veil” it happens more often than not with small businesses in CA at least. It very easy to prove if you have specific examples, and potentially cost the business owner more money. I speak from experience with a past partner that used the account as his piggy bank, he refused to pay the money owed $125k and the judge agreed with my lawyer that he chose not to pay out of spite, and abused the protection given with a California Corporation. We tried to settle for $85k before litigation just to get it over with, partner chose to take it all the way assuming he was protected, I now have a $187,500.00 judgement on a home they are trying to sell now.

  10. Hello Eric,
    I am the owner of my business company and I am the only who work for the company. How should I pay myself? I have the business account. Transfer or check?

    1. Hi Liset.

      That would depend on how you have the company structured. It sounds like you are a sole proprietor or Single-Member LLC, so then you can simply write a check or do an online transfer.

  11. Great article! My husband and I own an LLC as of last year and have been scouring the internet for answers as to how we should go about paying our rent and utility bills and auto loans. He’s been full-time in the business for years, but I just switched from my W-2 job to being full-time entrepreneur a month ago. We used to be able to get by paying personal expenses from my job, but now since we’re working for ourselves, pretty much all income goes into the business account. We want to be ethical and legal and avoid IRS trouble, but we use part of our home and our cars for business use. We claim it on taxes, but can we use the business account to pay all or part of the monthly expenses?

    1. Hello Mel.

      The sarcastic answer: it’s your business you can do what you want.

      The real answer: you should never pay personal expenses from the business and you should never pay business expenses from your personal money directly.

      Like I lay out in the article–make a monthly budget of your personal financial needs then divide it by two and make transfers of each half twice a month. That will simulate receiving paychecks and then you can pay your bills from your personal money.

      When you have a business, especially a partnership that is a separate legal entity that files its own tax return you should keep a very clear distinction between your business and personal money.

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