Kash is King - The Official Kashoo Blog

Accounting, business and technology insights for those who are blazing their own trail to success.

Are you a Solopreneur? How to Pay Yourself

Posted by Amrik Randhawa on July 9, 2012 at 8:30 PM

If you are a solopreneur (freelancer, solo practitioner, independent contractor, etc.) and not an employee of another company, it is part of your job description to figure out how to pay yourself a reasonable monthly and annual compensation.

In one scenario, you could take on as many projects as humanly possible, work very unbalanced 80-hour weeks, collect all of your accounts receivable, pay all of your bills, and if there’s anything left on the last day of the month, transfer that meager sum into your personal bank account. Unfortunately, that is the way many freelancers handle their finances.

However, since you are reading and following this blog, we know that you are seek and appreciate all tips and knowledge about the best way to structure your finances and utilize your small business accounting software to your advantage.

Unlike salaried employees, the income of solopreneurs most often is erratic, with many peaks and valleys. I often tell people that I get paid “irregularly and in bunches”, which is very true; but I also enjoy the many freedoms of being my own boss, so it is essential for me and all freelancers to plan and project carefully.

The most important consideration is your business structure; that 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 and freelancers, however, operate under no formal legal business structure and simply deduct their business expenses from their personal income when filing their taxes. Many, however, have formed one of the different types of “limited liability” corporations in the United States. In conjunction with the recommendations from your accountant and tax attorney, you can decide whether to pay yourself a set amount every month, or 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.

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).

The second most important thing you should do when deciding how much you should pay yourself is to figure out exactly how much you need as a minimum each month to meet your personal obligations and to meet your 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.

Of all of these important things, the most important thing 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 and your small business accounting application, you will be 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?

About Kashoo
Kashoo Inc. (http://kashoo.com) develops simple cloud accounting and bookkeeping software for small business owners around the world. Check out the company's iPad app, ideal for entrepreneurs on the move. Founded in 2008, Kashoo is located in Vancouver, Canada. For more information about Kashoo, visit http://kashoo.com.

Topics: Know and Grow Your Business