How Shop Owners Pay Themselves
Small business owners discuss the various ways they draw their own pay. September 5, 2006
In a one or two man shop, how do you, as the owner, figure how much to pay yourself? Do you figure a percentage of the net profit - or maybe by the hour? I am not asking in regards to tax reporting info.
From contributor A:
I don't pay myself. Everything goes into the general fund bank account and I withdraw whatever is needed at the time I need it. This works for me. I am still doing business as a sole proprietor. I need to become an LLC. If you are a corporation you need to draw some sort of a salary.
From contributor B:
I've tried everything, but the only method that actually transferred money out of the business with consistency was simply giving myself a regular salary just like my employees.
From contributor C:
I work with a weekly cash allowance for incidentals and then at month’s end after all shop bills are paid I take a good portion of what remains. I also put back whatever is needed whenever the shop runs a little tight in cash flow. If I was larger, say a dozen or more employees, I would take a regular weekly salary. I would also be LLC or corporation by then. Do whatever works for you but always leave money for the shop to run.
From contributor D:
I have been in business 6 years. I have a partner and one full time employee. My partner and I each take a set salary each week. If we have a few good months, we leave the excess cash in the business to help us thru the slower months. If, at the end of the year, we show a profit, which we usually do, then we will take a bonus. But we always leave plenty in the account for cash flow. It works for us. As for how much to pay yourself, take enough to live comfortably and pay your personal expenses. If you get greedy, you won't have enough left for slow periods. If you can't do that, then maybe you should find another business.
From contributor E:
I use a general account for my business as well and only pay my bills each month. For instance, my truck is paid but it is for business use too. But I pay my mortgage and insurances too. Anything that is not a necessity like clothing, etc. comes out of my wife’s salary. So in essence, I don't make that much.
From contributor F:
If you ever get hurt, temporarily or permanently, Workers Comp or Social Security will look at your salary to determine your benefits. I was off work for nearly 3 months because of an accident (building collapsed) and Workers Comp gave me 80% of my regular salary tax free. If all you ever do is withdraw from the business they don't look at that.
From contributor G:
I pay myself a minimum salary every two weeks. I have my business checking account with a self imposed cap of "X" dollars. I have a second account of "Y” dollars. The first account is the operating funds and the other account is my backup cash flow. The "caps" of each account are the same. At the end of each quarter I re-level the caps. If I have more in the first than my cap, I roll it to the second. If less than my cap I pull from the second to bring the first up to the cap. The quarters that the first account is full and the second account is full I draw out a bonus to bring the second account down to its cap. I'm paranoid of running out of money so I've set my caps high.
From contributor H:
I'm a one man shop and set up as a DBA. Everything goes into my business account, and I withdraw personal money as needed. Not really a great way to do things, but after five years in business I'm just starting to see some money. My wife has a good job and makes about twice what I do. Most of our home utilities come out of her pocket, while I try to throw in a little here and there. I am not making very much, but look at it as building the business. I am looking forward to being more profitable in the future.
On a side note - while listening to NPR yesterday, it was revealed that a large and increasing population of men between 22 and 34 are not working, or working part-time, and are moving back in with their parents. I think this is a good reason for those of us who work 40, 50, 60 hours or more a week for our own businesses, to pat ourselves on the back. Not all of us are making a ton of cash but at least we are still chasing after the American dream.
From contributor I:
I thought we were just supposed to own the shop, run the shop, run the office, and do the sales. The business pays the bills and gives some nice benefits at times, but are we supposed to get paid?
From contributor J:
I pay myself a weekly salary through payroll so all the taxes are withheld and paid. I also get to deduct the matching percentage of withholding taxes that would otherwise be a self employment tax (my shop is an S corp). I also own the building personally and rent it to the corporation. After re-reading the original post, how would you pay someone else to do your job? There should be a wage for the work being done, and the profits left go to the owner for the risk of being in business and investment made.
From contributor K:
For those of you considering filing AOI as an LLC, please see your CPA beforehand! If you're the sole owner, with no or few employees - then you're the chief cook and bottle washer...so what are the benefits of an LLC? Let your CPA point out the advantages and differences of C corp, LLC etc. He/she may agree that LLC is right, but in many cases they won't. For those who aren't paying into SS, I know with our lousy system it's easy to justify - but please remember that someday YOU may want or need to draw from it. I'm not condemning or judging you, just asking you to keep this in mind.
Setting up payroll is simple. There are people that will do this for you, and take care of all filing with the state comptroller, cheaply. File your business separate, and file your salary with your spouse and plan a good vacation with the return. Or, you may hire yourself a part time bookkeeper - maybe a student. Let her answer the phone, file receipts, keep books and handle payroll. The burden lifted brings a ratio of peace much higher than the satisfaction of doing it yourself.
From contributor L:
I was a sole proprietor for five years, taking draws from the business account. At some point, you reach a point where the self-employment tax makes it worthwhile to incorporate. For me sub S made sense, and now I pay myself a base salary of 36K a year, and take shareholder draws from profits to make up the difference. The money in the salary is taxed just like everyone else's (SS, etc.), but the money in the corporation only pays federal income tax.