Running your own business means you’re in control—until it comes to paying yourself. Surprisingly, many business owners stumble here. Cash flow isn’t usually the core problem; paying yourself correctly is.
Common Mistakes Owners Make:
1. Mixing Business and Personal Expenses:
- Pulling funds directly from your business for personal expenses.
- Impact: Damages your financial clarity and legal protections.
2. Paying Too Much Personally for “Spend Anyway” Expenses:
- Using your personal account to pay for expenses that could be legitimate business deductions.
- Impact: You lose out on valuable tax deductions and end up paying higher taxes.
3. Not Paying Yourself at All:
- Avoiding payments to yourself entirely.
- Impact: Triggers IRS suspicion and can be a major red flag for potential investors or lenders.
The Right Way to Pay Yourself:
S-Corp Owners:
- Reasonable Salary: Pay yourself a W-2 salary that aligns with your industry and role. This keeps the IRS happy.
- Distributions: Take distributions (which are tax-free up to your basis) to optimize tax efficiency.
Single-Member LLCs:
- Owner’s Draw: Instead of a formal salary, use owner’s draws. This won’t save on self-employment tax, but it’s the correct, IRS-approved method.
Leverage the “Spend Anyway” Strategy:
- If an expense qualifies as a legitimate business expense—stop paying from your personal account. Run it through your business to capture the deduction. Think: cell phone bills, vehicle expenses, home office costs, dining related to business discussions, and more.
Strategic Paychecks Lead to Maximum Savings:
Your paycheck as a business owner isn’t just about meeting your personal expenses—it’s a powerful financial strategy.
- Do it Wrong: You risk paying unnecessary taxes or attracting unwanted IRS attention.
- Do it Right: You keep more of your earnings legally, and strengthen your business’s financial and legal standing.
Paying yourself correctly isn’t optional—it’s essential for lasting business success.