How to Pay Yourself: Take It First

A business owner's LLC was profitable on paper, but his bank account did not agree.

I get this question constantly. The business has a good year on paper, but the bank account does not show it, because the cash kept getting plowed back into software, equipment, marketing, and a buffer for slow months. So how much should you actually pay yourself?

The honest answer is not a number. It is a habit.

Take it first

Do not pay yourself with whatever is left at the end. Take it first.

There is a book I keep on the shelf behind my desk, Profit First by Mike Michalowicz, and the whole idea is one flip. Decide your profit, then move it out of the way before you pay the bills. I do it twice a month, on the 10th and the 25th, into a separate account I do not touch.

See $20,000 in the account and you will find $20,000 of expenses. Set your profit aside first, and you will make $14,000 work.

Where people trip: gross versus net

A lot of owners get tangled up here. A service business might show a healthy gross margin and assume that is the money available to take home. It is not.

So start simple. Each month, move about 8% of your gross income, not your gross profit, into that separate account. Low overhead businesses can go higher, sometimes 35%. The exact percentage matters less than the discipline of doing it first.

Your CPA can fine tune the percentages for your situation. This is a money habit, not tax advice, and how you take the money out of a single member LLC has its own set of rules worth getting right. For the longer version, see How to Pay Yourself: A Guide for Small Business Owners, and if the question is really about timing, How Long Should I Wait to Pay Myself as a Business Owner?

The questions that come up between tax seasons

This is exactly the kind of question I love getting, and it is the kind that does not fit anywhere. It is too small to book a meeting over and too important to guess at, so it waits until tax season and then it is too late to change anything.

That gap is what our Momentum membership is built for: unlimited business and legal answers as they come up, instead of saving them for a once a year scramble.

The bottom line

Profit is not what is left over. It is what you take out first, on a schedule, before the business finds somewhere else for it to go.

Pick a percentage, pick two dates a month, and open the separate account. If you want to talk through how that fits with your entity setup and how you are paying yourself, book a free consultation.