How does a self-employed pay himself?

June WalkerI am often asked by indies — my affectionate name for self-employeds —  how can they give themselves a paycheck. Here’s a question from an IT consultant. His ID has been cleverly disguised.

Hi June, I j

ust started a new business – website design and development. When you own your own business is it more beneficial to pay yourself a salary or are you able to write yourself checks as needed for living expenses from the profits?
Thanks,
Walter Webguy  in Oklahoma

Dear Walter,
You, like many self-employed, use the wrong term when referring to money you want to take out of your business. The only people who can earn a salary are employees. You’re a new business and you didn’t say that you are a corporation so then you must be a sole proprietorship. And you can’t be an employee of your own sole proprietorship.

You are your business. Your business is you. You bring in money from clients. You pay out expenses. What’s left is profit. Profit is what you’ll pay tax on and profit is your “income.” How you take out money from your business, or when you take it, or how much you take has no effect on your profit. If the money is there you can take it out whenever you want.
Also, as you may already know: Indies Do Not Need A Business Checking Account.

And so, you might very well be taking money out of your personal checking account.  

Here’s an example: In one month a client pays you $5,000. You purchase $5,000 worth of supplies on a credit card. Your profit for the month is zero.

That’s $5,000 income minus $5,000 expense. But you still have $5,000 in your pocket because you took none of it out of your pocket to pay for supplies – you put the expense on your credit card and haven’t paid the credit card company yet. You still have the $5000 that the client paid you sitting in your checking account or in your pocket. You can take that $5,000 and go on vacation to Tahiti. Not a good idea but you could do it!

Since you have a basic question about income I think you might have a lot of questions about the basics. I suggest you read the book that can explain to you the basics of your tax and financial life as an indie, SELF-EMPLOYED TAX SOLUTIONS.
Wish you success!

June

One thought on “How does a self-employed pay himself?

  1. Jon

    The best thing I ever did was research, buy, and learn to use my accounting software. Every bit of income and every expense gets assigned to the job it’s for. I “pay myself” a portion of the net from each job, and sock the rest away for taxes and expenses that don’t belong to any one job.

    I spend a little time every week, and a little more time once a month to keep it all straight. (Or, at the very least, a bit of time every time I “pay myself.”) Come tax time it’s as easy as printing out a report.

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