Are you wondering how to pay yourself in your LLC?
Are you an online entrepreneur who maybe has a new business that's finally starting to generate some cash flow and you're just not quite sure how to do the most important thing, getting that cash out of your business… legally?
Let's talk about that today.
Today, I want to talk to you about one of the most frequently asked questions that I get, and that is how to pay yourself if you own an LLC. I really want to help you understand how you go about paying yourself the right way.
There's a lot that goes into this.
It's not just as simple as writing a check.
There's more to it than that.
How to Pay Yourself LLC
Here's some of the common questions I get that revolve around properly paying yourself from your LLC.
Number one, you just, practically speaking, don't know how to do it.
Number two, you're wondering, do you take a payroll? If so, how does that work? How do you figure out how much you need to pay in taxes? That's all very confusing.
Number three, some people wonder, can I just transfer money from my business account to my personal account? Is that sufficient?
Then probably one of the most important aspects of this entire discussion is, how much do you pay yourself? I mean, that's legitimate, right?
And then finally, maybe I should've said this is the most important thing. But what do you do about taxes? How much do you pay in taxes? What payroll taxes do you have to pay? Do you have to pay any payroll taxes? What about estimated taxes, and quarterly taxes, and state taxes, and federal taxes, and all these things?
Related Resource: To sign up with a payroll service I use and love, click here (affiliate link).
It's enough to make your head spin. So many questions.
And then probably last but not least, if you get this wrong, I mean, that's probably not good, I'm guessing. And I'm not guessing for me. I know it's not good, but you might be guessing, “It's probably not so good if I get this wrong. I might owe a lot in back taxes and I might have a huge tax bill at the end of the year that I'm not even aware of.”
It just could be really, really bad. And then there's so many other things that are implicated.
Your retirement accounts, how much you can contribute to your retirement? The different types of retirement accounts that are out there will all be dependent on how you pay yourself.
So there's a lot going on here with this whole idea of paying yourself from your business.
So let's talk about that here for a minute. I'm sorry it took me a long time to get into that today, but I wanted to give you a little intro of where this is going.
When it comes to making sure you pay yourself appropriately, it all starts with keeping accurate books.
I can't tell you how many people mess this part of the process up. They don't have an accounting system.
A lot of times they either have a checking account register like one of those old pamphlets that your mom or dad used to use to write out the checks at the grocery store or they have an Excel sheet that they try and track their expenses with.
Or some people will use some old outdated software that they found online like… What was that one called? Microsoft Money, I think, was one of them.
You Need Financial Tools to Keep Track of Your Finances
Anyway, there's all sorts of different tools that people use to try and keep track of their finances. But the bottom line is you need to have a system. Whatever works for you.
My personal recommendation is QuickBooks Online. It's simple. It's easy to use. And it's not too terribly expensive. I think when you're just getting started, it's 20 or 30 bucks a month. And that's what I use.
They've made it so much more user-friendly. You can even pull in your transactions from your bank account.
Now, all that being said, it is built for accountants as well. So if you don't know your way around a general journal, or if you don't know what I'm talking about when I say general journal, probably you're going to need to hire a bookkeeper to help you with this, or at least to get it set up and tell you how it's going to work.
That might not be a bad investment on your part. But QuickBooks is one of them.
Another piece of software that I can recommend, although I've used it, I'm not a big fan of it, but I know other people use it. It's called Xero. And that is another piece of software that you can use. I know a lot of people really enjoy it. It's easy to use.
FreshBooks is another one. However, FreshBooks, my understanding is, only does invoicing and processes payments. I don't know if it is an all-in-one accounting solution for your business, but those are some options that are out there these days that you might want to think about.
But whatever system you use, make sure you have a system that can pull in your transactions from your bank account and allow you to see where the money is coming from and where the money is going when you spend it so that you can get a good sense of what your profit, what your income, your revenue minus your expenses and what your net profit is at the end of the week, month, year, quarter, whatever, however often you review these things.
Profit First System by Mike Michalowicz
Now, once you've got that in order, the next step I want to talk to you about is using the Profit First system.
These are the percentages that I use. If you're not familiar with the Profit First system, here is a link to another video I did, talking about the Profit First system.
Before I figured out about this system, my finances were in complete disarray, they were ridiculous, and then somebody mentioned the Profit First system to me.
This is a system that was developed by Mike Michalowicz. Now, he's got a book. I highly recommend it, here is a link to that.
It was like my life changed. And the basic idea is that when you're eating dinner, if you put a bunch of food on a big, huge plate, which is what a lot of us Americans do, you're more inclined to eat everything that's on the plate.
But if you were to, say, put less of a portion on a smaller plate, then you're only going to eat what's on that plate, you're going to eat less and you'll lose weight.
That's the same general idea as the Profit First system. And the way we do this is by setting up four separate bank accounts for your business.
- You set up an operating account, which is where you pay all the expenses of the business.
- You set up a tax account, which is where you put money in for taxes.
- Set up a profit account, which is basically the pay-yourself-first method of the Profit First system. You put money in there to make sure that you have profit first, and you're seeing where the name of the system came in.
- Finally you have what's called an owner's pay account. And the owner's pay account is the money that you take out of the revenue that gets deposited. That's how much you're going to pay yourself each month or how often you do the Profit First system.
Now, me personally, I run an analysis of all my accounts twice a month, around the 10th and around the 25th. And I say around, because usually I wait a couple of days afterwards and do it once all the accounts have settled from the 10th or from the 25th and here is the system that I follow.
This is just me. Your system could be different. Your percentages could be different.
In general, I put 15% away in the tax account. I put 10% away in the profit account, as of right now. I put 40% I keep in the expense account and the other 35% goes to owners pay.
That's the system that I'm using right now.
Now, if you are taxed as a disregarded entity, which means that you just got your business started and you have not made an S-corp election yet, then basically what you can do is every twice a month or once a month, or however often you decide to do it, you can transfer the money between your business accounts in those proportions.
And then once a quarter, you will do two things.
You're going to make an estimated tax payment to the IRS for the amount that you would need to pay in estimated taxes, which is whatever is in your tax account. Basically take that money and send it to the IRS.
Then also at the end of the quarter, you'll take whatever money is in your profit account, and you'll divide it in half. And you'll pay that to yourself as a bonus to do something fun with, or to pay down debt, or to do whatever you want to do with that money.
However often is necessary for you, you can take money out of the owner's pay account and deposit that into your personal checking account, and then that's how you pay yourself in the business.
Typically it's going to need to come in the form of a check from the business to your personal bank account. Although there probably are some ways to get around that and to actually send the money electronically to yourself, if you would like to, or to do an electronic funds transfer for yourself.
But in my experience, most banks don't like to do electronic funds transfers to you personally, to the owner as a personal transaction. But maybe times have changed, I don't know.
I haven't had to do that in years because I use a payroll service that automatically takes money out of my owners pay when I run payroll and deposits into my personal account and then makes all the tax payments for me. That's the way I do it.
Related Resource: To sign up with a payroll service I use and love, click here (affiliate link).
Now, I realize that in the few minutes that I've been discussing this, this sounds like a complicated system
And frankly, it might be a little complicated, but it works. I mean, as I mentioned before, my finances were just bad. They just were not good with the business.
I didn't even know how much to pay myself. I didn't know how frequently to pay myself, although it's always been about once a month is what I've done. And I never had enough money at the end of the year to pay my tax bill.
It was a big, big, huge problem for me and my business.
Once I started following this Profit First system, everything got so much easier. And not only that, but now I can see the profit account growing, I can see the tax account growing.
I know I'm going to have a big tax payment for 2021. I'm not worried about it because I have the money there to pay those taxes.
That being said, it doesn't change the fact that making a big tax payment still kind of hurts a little bit. Yeah, it sucks.
The beauty of this system is that it's going to help you get your expenses in check. You're going to limit the amount of money that you're going to spend each month. If you have a good month and you want to put more money into your expenses, you can do that or hire additional staff. You can do that.
If you have a bad month, you know that you need to cut back and only keep the expenses that you really can afford to keep.
A lot of businesses, the way they operate is profit last, which means that money comes in, they spend money on all of their expenses, whatever. It means the amount is left over at the end is what they get paid, or they keep as profit if anything is left over at the end.
But the key to this system is that you're taking your profit off the table at the very beginning and you know it's locked in, you know how much money you're going to be making from the business depending on how much money the business generates.
Related Resource: Need more information on starting a business? Download our cheatsheet here.
The question remains, how are you going to pay yourself each month? And so really, I think I already talked about this a little bit, but you can either write yourself a check or the alternative method is to pay yourself a salary.
Now, I highly recommend you go and get set up with a company called Gusto. And the way I set up my payroll is I use the owner's pay to pay myself the net amount of my check each month and I use my tax account to fund whatever taxes I have to pay out of my payroll.
So by doing it this way, I don't actually have to pay estimated tax payments each quarter, although I could, if I wanted to, but you don't have to. You just pay the balance at the end of the year.
So a couple of rules to follow when you're paying yourself, just to make sure we're all clear and on the same page about this.
Do not use your business account as your personal checking account.
That is a big no, no. That's going to get you in a lot of trouble. Do not do that. Do not commingle funds.
Don't use your personal account to pay business expenses, do not use your business account to pay personal expenses. Don't do those things.
And God help me if you're out there and you've got one account that you're using for your business and personal at the same time. That is about the worst thing you can possibly do. So do not do that.
Do pay attention to what money is coming into your business and what money is going out of your business.
This is why you need to use a software program like QuickBooks Online and you can get those reports very easily and figuring out what your profit and loss is each month.
Do also get professional help if you need it.
The best way to start is probably with a bookkeeper. Bookkeepers are relatively inexpensive, but they're worth their weight in gold. They can go anywhere from a couple 100 bucks a month to six, 700, $800 a month, depending on how much that you're going to have them do for you and how much work and time they need to spend on your accounts. But that is a great investment for you, especially if you're just getting started.
And if they do nothing else, then set up your QuickBooks for you and show you how to use it. That is going to be money well spent.
And I can promise you that if you follow these rules, you're going to have so much more confidence and control and security in the running of your online business.
It is a great way to get started on the right foot. If you liked this video, make sure you check out this other video I did right here that talks more about the Profit First system by Mike Michalowicz and how to make it work for you.