How does a self-employed pay himself?

Hi June,

Just started a new business – irrigation installation. 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?

Shawn in Oklahoma


Dear Shawn,

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 incorporated 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 money out of 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.

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 for supplies – you put it all on credit card and haven’t paid the credit card company yet. You can take that $5,000 and go on vacation to Tahiti. Not a good idea but you could do it!

And, as always, read the book that can simplify your tax and financial life, AND save you money! SELF-EMPLOYED TAX SOLUTIONS .

Best,
June