Being self-employed gives you the freedom to work on your terms and be your boss. However, with that freedom comes the responsibility of managing your finances. One of the most significant challenges that self-employed individuals face is how to pay themselves. Unlike traditional employees, self-employed individuals don’t have an employer to handle their payroll. In this article, we’ll explore the various ways self-employed individuals can pay themselves.
Before we dive into the different methods of paying oneself as a self-employed individual, it’s crucial to understand the importance of separating personal and business finances. Keeping your finances separate helps you stay organized, makes it easier to file taxes, and provides clarity on how much money your business is making. With that in mind, let’s look at the different ways to pay yourself as a self-employed individual.
Drawings
One of the simplest ways to pay yourself as a self-employed individual is through drawings. Drawings are simply taking money out of your business account for personal use. This method is popular among sole proprietors, partnerships, and LLCs. However, it’s important to note that drawings are not considered a salary or wage, so they are not taxed as such.
Some advantages of drawings include:
- Flexibility – You can take out money whenever you need it
- Easy to manage – No need for a separate payroll system
- No payroll taxes – Unlike a salary or wage, drawings are not subject to payroll taxes
Salaried Pay
As a self-employed individual, you can also pay yourself a salary or wage. This method is popular among LLCs and corporations. Paying yourself a salaried pay means that you receive a set amount of money on a regular basis, just like a traditional employee. This method is more formal than drawings and requires a payroll system.
Some advantages of salaried pay include:
- Predictability – You know exactly how much money you will receive each pay period
- Professionalism – A salary or wage may be more attractive to lenders and investors
- Payroll taxes – Paying yourself a salary or wage means that you will need to pay payroll taxes
Distributions
Distributions are a method of paying oneself that is popular among LLCs. Distributions are similar to dividends paid to shareholders of corporations. As the owner of an LLC, you can pay yourself a distribution based on the percentage of ownership you have in the company. Distributions are not considered a salary or wage, so they are not subject to payroll taxes.
Some advantages of distributions include:
- Flexibility – You can take out money whenever you need it
- Tax savings – Distributions are not subject to payroll taxes
- Easy to manage – No need for a separate payroll system
Conclusion
As a self-employed individual, there are various ways to pay yourself. The method you choose will depend on your business structure, financial goals, and personal preferences. Whether you choose drawings, salaried pay, or distributions, it’s important to keep your personal and business finances separate and stay on top of your taxes. By doing so, you can ensure that your business continues to thrive and support you in the long run.