The Entrepreneur Salary: 5 Steps to Paying Yourself First

It can be easy to mix up your personal and business finances if there’s not a defined line between the two. Having a set plan to track your business income and expenses is the first step to building your entrepreneur salary.

Start with opening a business bank account, and move all of your company’s income and expenses to it. You can also apply for a business credit card to help build credit.

Paying yourself an entrepreneurship salary can prove that your financial well-being depends on the success of your business, and shows to employees and investors that you are committed to it. In addition to that, it indicates to the IRS that your business is legitimate.

Establishing an entrepreneur salary from the beginning will help you keep accurate financial records and help you paint a better picture of what the company’s costs are and what issues need to be addressed.

It takes some research to figure out how much you should be paying yourself. According to the IRS, all employers must receive a reasonable compensation, which is essentially something comparable to wages of employees with a role similar to yours.

Start your research by looking at how much similar entrepreneurs are being compensated for in your area. You can also research positions that align with yours in other companies or ask other business owners in your industry.

When deciding how much to pay yourself, it’s important to take taxes into account. There are advantages and disadvantages of taking a payout or reinvesting in your company.

Consulting with an accountant can be a good way to figure out which tax regulations affect your type of business entity. They will guide you through how to make the most of your deductions, shareholder distributions, and any other tax breaks.

Scheduling your paychecks will help you manage your business’s expenses better.

Generally, companies will schedule employees’ pay on a weekly or monthly basis. Talking to your accountant can help you decide if it’s better to pay yourself weekly, twice a month, or monthly.

Having a consistent schedule can also help you manage your finances. Additionally, it will assure the IRS that everything is being accounted for since inconsistent withdrawals could potentially trigger a tax audit of your company.

You need to decide how you will pay yourself. It’s worth noting that IRS ownership compensation requirements differ depending on your type of business entity:

• Sole proprietorship
• General partnership: An entity with two or more business owners. 
• Limited partnership: An entity with two or more business owners, with at least one being a limited partner.
• C corporation: An independent legal entity separate from the business owners.
• S corporation: An independent legal entity separate from the business owners; owners report revenue as personal income.
• Limited liability company (LLC)

Paying yourself through the salary method is essentially the same as getting paid in the workforce. You’ll be paid on a regular schedule and it will be a fixed amount or based on the hours worked.

If your business is registered as a C corporation or an S corporation, you are legally required to receive a regular salary. This means it will include withholdings for Medicare, Social Security, and federal and state income taxes.

Business entities that can use the salary method:

• C corporation
• S corporation
• LLC (if treated as a corporation for tax purposes)

When using the owner’s draw method, you will withdraw money from your business revenue to pay your entrepreneur salary as you see fit. Instead of a regular fixed income, this allows for greater flexibility and the possibility of adjusting how much money you earn depending on your business performance.

Business entities that can use the draw method:

• Sole proprietorship
• General partnership
• Limited partnership
• LLC

• Employee Compensation: If you have one or more employees, you’ll want to consider their salary and what was promised to them.
• Cash Flow: Successful business owners have a clear understanding of their company’s financial reports.
• Growth Rate: Planning for growth is important for your business to keep flourishing.
• Personal Finance: One last thing to consider when setting your entrepreneurship salary is what you can afford.