How to Pay Yourself as a Small Business Owner — Witches and Weirdos

Sometimes it’s the little things that trip us up the most, isn’t it? The things that seem SO obvious to some people, but no one ever ACTUALLY taught us how to do. Things no one never gave us explicit rules or examples for.

One of those things in business is how to pay yourself. So you can, you know, benefit from the fruit of your labors. Well, wonder no more, because we’re diving in!!

Note: everything we’re going to cover today applies to sole proprietors and single-member LLCs. (Well, single-member LLCs without an S-Corp designation. If you’re not sure if you’re an S-Corp, it’s safe to assume that you’re not.)

The short answer of how to pay yourself:

You pay yourself right from your business checking account! As much or as little as you want, as often (or as infrequently) as you want.

Yup, it really is that simple!!

But I’m not going to just leave it at that. (You know how I mentioned explicit rules and examples? Yeah, those come now.)

The actual mechanics of paying yourself:

What we’re after is moving funds from your business checking account to your personal account. Here are 3 ways you can do this:

1. If you have physical checks for your business checking account (I know, how quaint!), make a check out to yourself from your business account and deposit it to your personal account. Yes, it seems weird to have your name in both the “Pay to the order of” line AND the signature line, but that’s how you do it!

2. Transfer funds from your business account to your personal checking account online. If your business account and personal account are at the same bank, it’s almost certain that you can do this. If they are at different banks, you’ll have to poke around and see if one or both of your banks allows “outside” transfers. More and more banks allow this. For example, I have my business checking account at Relay Bank and my personal accounts at Ally. Both websites allow me to transfer money back and forth between Relay Bank and Ally. (I always initiate transfers from Ally, because the funds get delivered faster than if I do it the other way around.)

3. Venmo, Zelle, or CashApp yourself funds. To be frank, I don’t actually know exactly how this works, because I don’t do it myself. (Do I feel like a bit of a luddite? Yes, yes I do. But what I’m doing works for me, so I’m sticking with it!) I’m not sure if you need separate Zelle accounts for your business and personal accounts or even how CashApp works at all. I think if you’re using Venmo you’d need to go through the Identification Verification process. If anyone has any first-hand experience with this, please let me know!

So, what’s the catch?

Why does the IRS make this so easy when they seem to make everything else so complicated?

Well, there truly is NO catch. You really can pay yourself whatever you want, whenever you want, and it will have NO impact on your taxes. (Again, this applies to sole proprietors and single-member LLCs only.)

This is because as a sole proprietor or single-member LLC you are taxed on your PROFITS, not on how much you pay yourself. Said another way, you’re taxed on revenue minus expenses. And paying yourself isn’t an expense, so it has no impact on your taxes.

For example: 

• Your revenue for the year is $25,000. Your expenses are $5,000. Which leaves you with a profit of $20,000. 

• If you pay yourself every single penny of that $20,000 by transferring it from your business account to your personal account, you are still taxed on that $20,000.

• If you leave all of that $20,000 and don’t pay yourself a single penny (which I don’t recommend, but that’s another post for another day), you are still taxed on that $20,000.

So whether you pay yourself once a month on the regular, whenever you remember, or all in one lump sum at the end of the year, it doesn’t impact your taxes at all. So go ahead and create a system that works for you, your brain, and your cash flow!!