How to Pay Yourself and Do Basic Bookkeeping as a Small Business Owner
Most of us get into business and we’re super pumped. We get our website up, market on Instagram, and tell our friends and family. We have Googled. We have talked to other biz owners and freelancers about how to get rollin. We land our first client, and it’s amazing. But then, a lightbulb goes off, and we think “uhh what do I do with this money.” Does it go into my personal bank account? Should I inject it straight back into my business. How does one pay themselves as a small biz owner?
Money may not be what motivates you, but we all need it. We all have bills to pay, retirement to save for, and dream vacations swirling in our minds.
When it comes to paying oneself, I see two struggles among new business owners. The first is not knowing how to take client payments and where to put the money. The second is the struggle between determining how to pay oneself and how much to pay oneself. Here’s the simple step-by-step on the basics to resolve these issues.
STEP 1: OPEN A BUSINESS BANK ACCOUNT
We all understand that we need, to some extent, to separate our business income and personal income. In the simplest terms, we should do this by paying all expenses from our business bank account and all personal expenses from our personal account. All business income also needs to go into your biz account.
Still need to open a biz account? Check out this blog I wrote on how to do that and what documents you need. Bookmark it for easy reference when you’re ready.
To get the money from one account to the other, I recommend writing yourself a check. Sounds old school right? I recommend this because it’s clean and easy. It leaves a paper trail. Unlike the average white-collar criminal, that’s what we do want. Your business bank transcripts should accurately reflect income in and expenses out of the business. Ideally, I could comb through your bank records and sort all debits into two categories, checks paid to you the owner, and then every other debit would be a valid business expense. Then, I could just add up all the credits (business expenses). It’d be quick and easy to determine an estimation of your gross income and net income. You would still have things like part of the mortgage or rent to deduct, for tax purposes, if you use a home office.
Note that after you form an LLC or corporation it’s actually required to separate your finances to maintain liability protection.
STEP 2: SETUP AN ACCOUNTING/BOOKKEEPING SYSTEM
Every small business needs some type of bookkeeping system. It can be simple or super sophisticated. I tend to pitch three options for bookkeeping which range in price. The first to use a spreadsheet. The send option is to use a program like Quickbooks, and the third option is working with a professional. If you’re starting from scratch and need to completing build your book of business, I recommend starting with a spreadsheet and progressing to the goal of getting a bookkeeper.
Should you hire a pro?
Ok, so here’s the 100% truth when it comes to bookkeeping. It’s really not that difficult, and you can absolutely do it yourself. I’m telling this to you as someone who makes money doing bookkeeping for others. You, may be thinking “ok, Braden, so how the hell do you make money then?” Time is money. Bookkeeping can be tedious. But more importantly, it’s the advice I give based on the numbers that makes me and other professionals valuable. Therefore, I don’t recommend outsourcing your bookkeeping as your first business expense. I can’t give you much advice, as a bookkeeper, when you’re bringing in $10,000.
So, when is a good time to outsource? The answer, in my opinion is when you have enough client’s to fill your time, OR once your netting more than about $40,000 per year. This number is arbitrary, so it will vary per individual. Obviously, your ability to outsource will depend on your own financial situation, but once you’re bringing in steady income, a bookkeeper is going to save you serious time, and good professional can give you tax and business advice. Look for someone with knowledge on your industry and business model.
my bookkeeping rate and services
You can find my rates here. You may think these rates are either above market or below market depending on where you have looked. Here’s a brief explanation of how I determined this fee structure. Most full time bookkeepers offer many of the services I offer, plus they will reconcile your accounts. This means that they will print your bank statements (or view them electronically) and go through line-by-line to verify each expense and make sure it’s properly categorized and that there is no suspicious activity, duplicate charges, etc. It’s very time-consuming. Most of these bookkeepers who are properly qualified will charge $300+ per month, and I would actually recommend one of these individuals once you’re making money in the multiple six figures, have multiple businesses, have a complex business model, or deal a lot with inventory. For many of my clients, these services are overkill. They just need help managing their Quickbooks account. You can find other bookkeepers that will provide that service for under $100. From my experience, those individuals are doing little to help your business. They may just log into Quickbooks for 15 minutes a month to look things over. Thus, I have structured my rates as a hybrid. I manage Quickbooks but also provide monthly calls to advise my clients. The benefit is that you get the brain power of a tax attorney with tax prep expertise who is also specialized in assisting creativepreneurs.
Alternatives to using a pro
As I noted above, you may not need a pro. A lot of new business others start with a spreadsheet which is a great option. I recommend organizing the document according the line items on the small business tax return. To make that easy, you can download my free small biz tax deduction guide. Just categorize the spreadsheet by each deduction noted in the guide. If you want to save some time, I have a bookkeeping Microsoft Excel template. I categorized the document by month and by tax deduction. It’s also set-up with formulas to automatically calculate monthly and annual profit and to calculate certain deductions and make your tax return easy breezy.
If you want an easier solution to manual mode, Quickbooks is my favorite tool. I’m biased towards QB because (a) they’re the industry leader and have terrific features and integrations, and (b) I use Intuit (the parent company’s) professional tax software, so if you or other’s hire me to do their return, the sync between QB or the tax filing software is amazing.
If you want to start using Quickbooks, you can use my link for 50% your first three months. If you plan to come to a DIY Tax Party, opt for the Turbo Tax Bundle option. If you are new to bookkeeping programs, basically it works by linking to your business bank account. That way all of your business transactions are automatically uploaded. You can also set rules to auto-categorize certain transactions. For example, I have can have the program automatically categorize my payment to WeWork as a rent expense. The more you use the program, the more automated it becomes and the less work you need to do. Once it’s time to file taxes, you can either import your books into Turbo Tax to self-file, or give your tax preparer access to your account.
blog excerpt from:
Depending on your business entity choice, you will be required to take different documents with you to open your account. Here is a summary of the required items for opening an account at SDCCU (some items may vary based on the bank):
STEP 3: FIGURE OUT HOW MUCH YOU SHOULD PAY YOURSELF
Whether you are a DBA sole proprietorship or a corporation, you should have some system to pay yourself. It need not be complicated either. I noted above that the ideal method starting out is to simply write yourself a check from your business operating account. (If you need checks, I recommend ordering through Costco. They’re super cheap).
Pay yourself whatever you have left after you pay your business expenses. Figure how much you need in your account at any given time to comfortably pay your expenses. Write yourself a check for the difference. For example, I know that I have business rent of $450 a month. Online subscriptions for various programs total about $200 a month. My business is pretty lean, but I like to keep $1,000 in my biz account. On the 1st and 15th of each month, I write myself a check for however much I have above $1,000. If you are saving for a big ticket business expense, consider that. You may also want to consider opening a business savings account to stash money for quarterly taxes and other items you might want to purchase as a business expense.
Pay yourself whatever you need for your personal expenses. If your personal expenses total $3,000 a month, maybe you write yourself two $1,500 checks per month. Ultimately, as a pass-through single-member entity, it doesn’t matter whether the excess money (if you’re lucky enough to be in this position) sits in your personal or business account. You can then pay yourself a distribution on a quarterly basis as you accumulate more profit.
For new businesses, option one is the easiest. There’s no reason to keep money chillin in your biz account unless you’re saving for something. Move the cash over and put it work. Invest it. Treat yoself. Do something. The benefit of choosing a model more like option 2 is that you’re starting to treat yourself more as an employee of the business, which is actually great. This is a terrific practice to help transition yourself for the future. If you eventually want to form an S corp, you will put yourself on payroll and will need to take a regular salary.
However you decide to pay yourself, you should outline the process in an operating agreement. Once you get an LLC or if you’re starting with a general partnership, you need to discuss pay and details in the partnership or operating agreement. Confused on what a general partnership is or sole prop? Read this blog. Wondering what the hell an operating or partnership agreement is and why no one has yet told you that you need one? Read this blog.
what about if you have a partnership or an llc with a partner?
The process is very similar. The only difference is that you need to be even more diligent about having consistent pay in accordance with the terms of your partnership agreement. It’s extremely important for business partners to discuss pay details before they start getting clients. One common problem is that one partner may wish to wait longer to make payouts in order to spend more on business expenses to accelerate growth, while the other partner wants to start getting pay sooner. Discuss expectations from the out set. While it’s ideal for everyone to work with an attorney when starting their business, it’s particularly important for businesses with partners.
BUT WHAT ABOUT PAYROLL?
Once you form an S corp, you MUST put yourself on payroll. What this means is that you will outsource your paychecks to a 3rd party. That company will send you check and make withholdings for federal and state income taxes, as well as your social security and Medicare taxes. You can also get on payroll before you form your S corp.
If you have employees, you’ll need to put them on payroll. Penalties for failure to make proper payroll tax withholdings are steep. The calculations are complicated, and you don’t want the headache.
If you want a little more info on payroll or s corps, you can check out this blog on the topic.
SO THAT ABOUT COVERS IT . . .
Separate biz income, pay yourself, and do basic bookkeeping.