How to Pay Yourself as a Business Owner

As entrepreneurs, we sometimes tolerate things that we would never put up with if we had a “real” boss – like inconsistent income.

Seriously. If you had a corporate job where you had to sit in an oatmeal-colored cubicle for 40 hours a week, would you be ok with it if your boss told you that your salary will change every week depending on how the business does?

You wouldn’t be. And no matter how much you love your job, you shouldn’t put up with financial instability as an entrepreneur – and you don’t have to.

Here’s how to pay yourself as a business owner so you can live with more financial security, create peace of mind, hit budget and saving goals, pay down debt, reduce money anxiety, and make the best money decisions.

How to Give Yourself a Salary

Most small business owners put any money they earn directly into their pockets. They take the money they make from providing a good or service and use it for paying rent or buying groceries.

But whether you’re a solopreneur or lead a team, you are a business owner, and you need to factor your business into the equation. Instead of taking the money you make and depositing it into your personal bank account, put it in your business account and pay yourself a predetermined amount at regular intervals.

If you don’t already have a business account, just choose a bank – I recommend using a different one from where you do your personal banking – and they’ll give you all the steps you need to open an account.

In order to pay yourself a salary, you need to calculate these four expenses:

• Revenue: how much money you made
• Essential Business Expenses: expenses that are necessary for your business to function (e.g., website hosting, advertisements, employees)
• Your Salary: how much you pay yourself on a regular basis
• Your Net Income: the amount left over after you’ve deducted revenue, business expenses, and your salary

Now you’re going to start using what we call the “self-employed salary system.” It works like this:

Your revenue goes into your business account. The first thing you do is use that money to pay off your essential business expenses. Then you transfer your regular salary into your personal bank account. Whatever is left over is your net income; you hold onto this to take care of unexpected business expenses or to make sure you can still pay yourself if you have a down month.

Crucial Decisions to Make

All right. Now we’re about to dive into how to set up a payment structure, so if you’re still with me, give this video a thumbs up. First off, here are some decisions you have to make:

What’s your minimum salary?

How much money do you PERSONALLY need to earn in order to pay for your personal expenses (aka your life)?

At Dow Janes, we teach the 50/30/20 budget, which means you can spend 50% of your monthly after tax income on needs, like housing or food, 30% on wants like a night out, and ideally you save 20%.

To determine what your salary should be, first calculate your monthly needs. How much is your rent or mortgage? How much do you pay for groceries or transportation? At bare minimum, you need to make enough to cover the necessities.

After you’ve determined how much you need to live, give yourself enough money to have fun! Like I said, 50% of your monthly income should go to necessities, but 30% should go to just plain old enjoying life.

And ideally 20% of your income goes into your savings and investments. If saving 20% is not achievable for you right now, that’s ok! Prioritize saving at least a little bit each month and remember that your ultimate goal is to save at least 20% of your income to help take care of future you.

What’s the size of your target salary buffer?

Your salary buffer is like an emergency fund but for your business, it’s purpose is to provide you a consistent and reliable personal income even if your business revenue fluctuates.

Essentially, a salary buffer is money you set aside so that if you have an “off” season, you can still pay yourself your regular salary.

In months where your business does really well, you build up your salary buffer. In months when your business makes less money, you draw from your salary buffer so that you can still maintain the personal income you need to live your life.

Here’s how it works:

Let’s say your essential business expenses are $500 a month and your salary is $3,000 a month. You set the goal of having $9,000 in your salary buffer so that in the event your business doesn’t perform well, you have 3 months of personal income still available while you figure out how to generate more revenue.

Imagine that in March, you make $5,000 in revenue. First, you subtract $500 for your business expenses and $3,000 for your salary. This leaves you with a net income of $1,500. You put that $1,500 into your salary buffer. You keep putting additional net income that is over and above your salary into your salary buffer until you’ve saved up $9,000.

Once you’ve reached your target salary, you can use your net income to invest more into your business or withdraw the profits for personal use!

Now, let’s pretend your business fluctuates significantly. So, you made $5,000 in March, but you only made $2,000 in April. From that $2,000, you subtract $500 for your essential business expenses, leaving you with $1,500 which is not enough to cover your $3,000 salary - well good news, you can use the $1,500 you saved from March in your salary buffer to pay yourself your $3,000 salary.

That’s why it’s important to have an established salary buffer; that way, if you have a few bad months in a row, you can maintain a steady salary.

If your income fluctuates moderately (i.e., doesn’t drop or rise more than 50% a month), then you’ll want enough money set aside to be able to cover your needs for one to three months. If your business is more volatile, then you’ll want to save up three to six months.

When will you pay your salary?

In most corporations, employees are paid every two weeks. I would recommend sticking to this, but you can do whatever works for you – you are the boss, after all. Just be sure to set a regular interval and stick to it.

Next Steps to Pay Yourself as an Entrepreneur

Now that you have all the information you need, here’s a step-by-step guide to set up your salary:

1. If you don’t already have one, open a business bank account
2. Start depositing all of your revenue into your business account
3. Decide what your salary will be, what size your salary buffer will be, and how often you will pay yourself
4. Set up automatic transfer so your salary goes straight from your business account to your personal account (and while you’re at it, set up your personal account so 20% – or whatever you can manage – goes straight into savings!)
5. Commit to time every week to evaluate your finances – this will help you stay aware of how much is coming in and going out of your account so you can make sure you’re making the best use of your money

Once you’ve completed those five steps, congratulations!! You’re well on your way to creating a stable income.

Building Your Financial Security

Being able to rely on a consistent income will give you peace of mind as you do the work you love and build your business empire.

And if you want to learn more about how to take control of your finances so you can live with more peace and freedom, you should check out our free masterclass, Master Your Money, where we teach you the tried-and-true secrets to building wealth and setting yourself up for financial security and success.

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