There are two main ways to pay yourself as a business owner: you can pay yourself a regular salary just as you would an employee of the company, withholding taxes from your paycheck, or you can draw money from the profits of your business on an as-needed basis. Pay yourself a regular salary equal to a percentage of your average monthly profit. Don’t set your monthly salary to an amount that may stress your company’s finances. A sole proprietor earns income by contracting with and providing goods or services to various clients.
Pay Frequency and Methods
You can decide how often to pay yourself. Most employees are paid either two times a month or once every two weeks. However, as a self-employed individual, it’s up to you whether you prefer to pay yourself every week or once a month. You can write yourself a physical check and deposit it into your personal bank account or set up direct deposit.
Remember, as a self-employed individual, you must pay yourself by taking a taxable, small business owner’s "draw" from your business’s funds because payroll has to do with paying employees. Taxes aren’t withheld from these draws, so you’ll have to pay quarterly estimated taxes.
Managing Finances and Tax Obligations
We suggest you use Microsoft Excel to keep updated on expenses and wages. This will let you determine how much amount is safe for you to take out from your profits.
Self-employed individuals must withhold and pay self-employment tax to cover Social Security and Medicare taxes. The self-employment tax rate is 15.3% of your earnings. Use the five steps below to complete your self-employed payroll:
- Determine how much to pay yourself.
- Choose a pay frequency.
- Decide on a payroll method.
- Calculate self-employment tax.
- Pay self-employment tax.
You are not legally required to pay yourself super as the individual are considered the entity and do not fall under the law.
When you’re self-employed, think of three buckets when it comes to money – the money coming in from paying clients, the money you use to pay for business expenses, and the money you pay yourself. This simplifies how you manage your finances.