As a solopreneur, you work for yourself and enjoy the top benefits of working for yourself. Scheduling work, the ability to work on an island somewhere, well, you get the gist. Solopreneurs (freelancer, solo practitioner, independent contractor, etc.) are not an employee of another company. By working for yourself, it’s part of your job description to figure out how to pay yourself a reasonable monthly and annual compensation.
In this article, we’ll show you how!
How to Pay Yourself as a Solopreneur
How Not to Pay Yourself
Before we dive right in to describing how you should pay yourself as a solopreneur, we want to first highlight what you shouldn’t do. Now let’s get that out of the way…
In one scenario, you could take on as many projects as humanly possible. You can work very unbalanced 80-hour weeks, collect all of your accounts receivable, and pay all of your bills. If there’s anything left on the last day of the month, then you can transfer that meager sum into your personal bank account.
Unfortunately, that’s the way many freelancers handle their finances.
However, since you are reading and following the TrulySmall blog, we know that you are seeking and appreciate all tips and knowledge about the best way to structure your finances and utilize your small business accounting software to your advantage.
That’s where we come in.
Here are a few key things to consider for your business:
Get Used to Irregularity
Unlike salaried employees, the income of solopreneurs most often is erratic, with many peaks and valleys. Solopreneurs are often paid in “irregularly and in bunches”, which is very true. However, you also get to enjoy the many freedoms of being your own boss, which is essential for many people who choose this route.
Structuring Your Business
The most important consideration is your business structure. This designation will determine how you are paid. If you are a corporation, you will pay yourself an actual salary and benefits, plus dividends. Of course, consult with your tax attorney for the exact details for your specific situation.
Most solopreneurs, however, operate under no formal legal business structure. They simply deduct their business expenses from their personal income when filing their taxes. Many solopreneurs and freelancers have also have formed one of the different types of “limited liability” corporations in the United States.
Combine the recommendations from both your accountant and tax attorney. From there, you can decide whether to pay yourself a set amount every month, a commission as a percentage of gross or net income, or one of several other combinations, including dividends, if your company pays its shareholders dividends.
Set Aside Dollars for Taxes
As a business owner, no matter what your business structure, you must set aside a certain amount to pay the quarterly and annual taxes for your business and/or yourself as a self-employed person. The important information you need to correctly compute your tax obligations is detailed at the IRS website (U.S.) or the Canada Revenue Agency website (Canada).
Identify the Minimum Income Goal Each Month
When deciding how much you should pay yourself, figure out exactly how much you need as a minimum each month to meet your personal obligations and personal income goals. Plan your ongoing marketing efforts and sales funnel for your contracted projects to meet those minimums and goals, which will be unique for your circumstances. There are many websites, articles, and blog posts that help you to figure out how to price your services and products to most effectively meet your income goals. While this largely depends on your experience, niche, industry, and region, most freelancers can find out what others are charging, then basing your pricing strategy off of that.
Pay Yourself What You Are Worth
The single most important consideration is that you pay yourself what you are worth—on a regular basis, and to achieve the lifestyle that you desire. Armed with intelligent planning, the knowledge and recommendations of your accountant and tax attorney, and financial data from your personal financial institution is already half the battle. From there, a small business accounting software can enable you to be fully equipped to derive the income from your business that you envisioned when you set up shop as an solopreneur. Isn’t that one of the main reasons you hung out your shingle?
Does your small business embody every element of success except for a simple accounting software? If so, then TrulySmall Accounting can help! TrulySmall can easily integrate with the business bank feed of your choice to make double-entry accounting, invoicing, expensing and reporting much easier (and less time-consuming). The income insights derived from TrulySmall can even help you identify your monthly income goal and the minimum take-home pay you should take to pay yourself. Try it for free today!