Paying Yourself as a Small Business Owner

One of the most complicated aspects of starting a business is figuring out how to pay yourself. You want to make sure the business has enough money, but you also need it to support you. So how do you pay yourself as a small business owner? I’ll discuss some tips for paying yourself as a creative today.

Separate your Bank Accounts

The first step to paying yourself and understanding your business finances is to separate your bank accounts early on. As soon as you start your business, you should make a separate checking account for all business transactions. This money might not be legally separated (see step 3) quite yet, but it’ll help you be able to see how much is coming in and going out.

If you plan to make any investments into your business, simply transfer those into this new account to cover operating costs until you start making more money. Any incoming payments should go here too, when your clients pay you. Lastly, link outgoing payments like credit cards, vendor accounts, etc. into this account as well. If you’re a stationery designer like me, check out this credit card that has a special loophole to get 5% back when ordering certain prints, papers, and envelopes! 

One additional thing you can do is set up a savings account for the business as well. I have a recurring automatic transfer into my savings account each month, just to set some money aside in case it’s needed. You can use this for taxes, large investments, or as an emergency fund.

Keep Track of your Finances

Now that you have separate bank accounts for your business and personal expenses, you’re on your way to managing your business finances. You’ll need a clear picture of how much is going in and out in order to start paying yourself a consistent rate. This will also be helpful at tax time.

When you’re first starting, you can keep track of every transaction in a spreadsheet if you’d like. However, as you grow this will definitely become unwieldy. I use Quickbooks to manage all my transactions. You can connect your bank accounts for easy use. Then as you grow, you can see where money is going, where it’s coming from, and easily share information with your accountant as needed.

Choose the Right Tax Filing Status

Depending on how you register your business, you may need to pay yourself in a different way. For instance, if you are a Sole Proprietorship or a Single-Member LLC, then you are taxed as a “pass-through entity”. This means that you’re paying taxes on all your business income on your personal tax forms. In this case, there are fewer legal restrictions on how you pay yourself or move money around. I say “legal” restrictions though because it’s still smart business practice not to mingle your business and personal money willy-nilly.

With a pass-through entity, you will pay income tax on all the income, as well as self-employment tax. This can get expensive after a certain point. Then, you might elect to file as an S-Corporation. I’m not a tax accountant, but usually if your business is making $50k+ in profit, you should start look into the S-Corp election.

If you file as an S-Corporation, then you will need to put yourself on payroll and start paying payroll taxes. You also are able to take “draws” as the owner of the business, which are taxed differently. You need to be careful to balance your salary vs. your draws, and stay on top of the payroll taxes. This can be a lot more complex than paying yourself as a Sole Prop or Single-Member LLC. But it can save you money on taxes. Make sure you know the regulations before switching over! 

Price Your Work for Profit

When you are pricing your work as a small business owner, there’s a lot more that goes into it than you might think. You need to price such that you cover all of your expenses, your taxes, and then some. That “and them some” allows you to keep the lights on in your business and get good wi-fi, but most importantly, it allows you to pay yourself a consistent salary. 

If you make $47/hr at a “normal” job, you’ll make about $100k/year (before taxes). But if you charge $47/hr for your work as a solopreneur, you will likely make a lot less than that. The reasoning for this is that you’re not always doing directly billable work. Sometimes you’re making a website, or ordering supplies, or spending 3 hours scrolling through Instagram for Reels ideas (just me?!). So your pricing on billable projects has to cover all of that time as well as the project time.

A general rule of thumb when you’re starting out is if you’re doing billable work about ½ the time, then your hourly rate should be double what you want to make. If you’re doing billable work about ⅓ of the time, your hourly rate should be triple what you want to make. This is a very loose guideline, but if you’re a stationery designer, I will walk you through my entire pricing structure as part of our membership, Stationery School. A very basic, simplified pricing structure you can start with is: Time + (Expenses x 3). 

Your expenses will be up to you to determine. Most experts advise setting aside about 30% of profit for taxes on each incoming payment at first. This is where that savings account could come in handy! 

Start Where you Can

You probably won’t be able to pay yourself as much as you’d like at the very beginning of your business. It’s important to leave some money in the business to account for investments and expenses. But consistency will help you get used to having money leaving the business, and make it easier to pay yourself a full salary, when you’re ready.

If you don’t feel you can do a consistent transfer, then I’d recommend after every large project paying yourself 30% of the profit. Just transfer it over into your personal account.

Once that becomes a little more regular, set up a recurring transfer to your personal account every two weeks – basically a “normal” paycheck. Again, make sure this complies with your tax filing status. This will work fine if you’re a Sole Prop or Single-Member LLC. 

Even if your “paycheck” starts at $100 every two weeks, it’s still getting you used to money flowing in and out of the business, and you can use that $100 to support certain personal financial needs.

When to Pay Yourself More

When is it time to pay yourself more? When you have a consistent emergency fund built up, and you’re saving an appropriate amount for taxes. If you’re in your first year of business, you may not pay taxes quarterly like you probably will in subsequent years. So it might feel like you have a lot of money saved up after a while. Just remember that around 30% of your profit for the year will have to be paid in taxes, and this can be a large chunk.

As you feel more comfortable, you can increase your biweekly paycheck over time. This is likely a time when you’re still playing with pricing as well. I recommend increasing your pricing after 3 people book your top package. If you increase pricing and expenses don’t increase, this could be a good time to up your paycheck as well. 

How much is a good amount to pay yourself?

This will depend on a lot of factors, but remember that you’re paying taxes on all the money your business is bringing in, whether you officially pay it to yourself or not. I’d recommend calculating how much of a regular salary you need to support your lifestyle, and capping it there. You don’t need to increase your lifestyle every time your business has a good season. Instead, you can give yourself “bonuses” if it makes sense, or use some business money to invest in growing the business. Once I built up to a reasonable salary, I didn’t give myself a raise for about 4 years, even though the business was consistently making more money every year.

Some things to look into as you’re making more are retirement investing, large investments like equipment, or even outsourcing some tasks or hiring employees. It might be tempting to just pay yourself more, but all of these investments will help your business’s financial picture in the long term! 

Overall, paying yourself as a small business owner can be a little tricky. The earlier you start, even with a smaller amount of money, the better off your business will be.