“I don’t pay myself; I just take a little bit here and there when I need it.” I hear this phrase all the time from entrepreneurs. Even from owners of businesses with employees. They just don’t take a check. But they do get paid. Here are some of the top objections to setting paydays, and some reasons you should really do it in your own business and for yourself.
1. Setting paydays: It’s all my money anyway
Maybe. Depending on the structure of your business that money belongs to your LLC or corporation. If you are a sole proprietor the argument can be made that yes, it’s all yours. But you are earning it in your business and keeping business and personal finances separate is important. Now, I know some business owners that still use their personal accounts for business transactions. They accept credit card payments to their personal accounts. That creates kind of a mess for business expenses. There are fees for accepting cards, and these are co-mingled with personal money. And oftentimes, business expenses are missed when they are mixed in with the personal.
Separating your finances is one of the easiest things you can do that protects the integrity of your business record keeping. All of your payments earned in your business go into the business account.
Your expenses stay clean and you can still get your money from the work you do in your business.
2. setting paydays: I don’t need take the extra step to write myself a check.
Taking the extra step to pay yourself protects your business and personal cashflow. Here’s what I often see happen. The electric bill is due, and “just this once” you are going to use the business debit for your personal expense. Or you just write a business check to the orthodontist because it is just “easier” than taking a check and depositing it in your personal account. In both of these very common occurrences you are potentially messing with your cash flow.
If you dip into your account throughout the month for expenses you are increasing the chance for a cash flow issue. There are always things that can happen to your income. You can have a chargeback. Or you can have a client pay late. Or you can have a down sales month. Many times, unexpected challenges affect our business financially for a time. If you set two days a month that you would take time to write that paycheck (for what you really need to support your personal expenses) you allow the cash in your business to build up throughout the month. For example, instead of 8 draws on your cash for personal bills, you would have two.
3. setting paydays: I don’t take that much anyway.
The tax liabilities on small business owners can be huge where the taxes aren’t withheld when money is taken from the accounts. More than once when the books are actually reviewed did the entrepreneur have to do a double-take to see what was actually taken. Owner’s draws, those little withdrawals from the account for personal use, add up and they are taxable as self-employment income. In the U.S. you have to pay Social Security and Medicare taxes on your personal income. It is very easy to take a little bit each week, and not pay taxes on it. Because it doesn’t feel like very much.
AUTHOR’S NOTE:
In reality, you can set up a process to withhold and deposit your taxes every time you take a paycheck. Having an online payment portal to the IRS is easy in the states. You can make a transfer when you pay yourself. Over the course of a year, it is very easy to take $20k or more from the business and not feel it. $20k a year is only $1667 a month, which is a little over $400.00 a week. Pay your car payment and insurance, grab a little bit for groceries, and buy a birthday gift for your mom and you can easily hit that a month. You will then owe taxes on that $20k.
Take the time to set yourself up to protect the integrity of your business records, protect your cash flow, and protect your personal income by setting up paydays for yourself. Taking a check every other week is a great way to also predict your income for your personal expenses and allow you to have some income security.