When you own a business, it can be tempting to take your business income as your own, but setting up regular income is a better system.
Owning a business is tough, especially if you’re the sole employee/owner.
Everything gets a little messy: Is this purchase for myself, or is some of it for my business? Are these taxes for me as an employee, or me as a business owner?
Not too long ago, I converted my sole proprietorship into an LLC, mainly for the liability protections. I assumed that this would mean that I would be filing two separate tax returns: one for me, one for my business.
But when you’re a solopreneur, unless you specify otherwise, your business is considered a “disregarded entity” and your LLC continues to be an arm of your personal return.
Having your business be an extension of your personal existence has a lot of conveniences, but plenty of drawbacks. And the biggest drawback is the (in my view) mistaken belief that income for your business is the same as income for you.
It’s not, or at least, it shouldn’t be.
I want every one of you who is a sole business owner to have regular, dependable income. And I want you to make that happen, even if your business makes wildly variable income.
When you have regular income, you will feel less anxious, and be able to make better plans for yourself and the people around you, both financial and otherwise.
So in this post, I’m going to show you can give yourself regular income, even when your business doesn’t.
Table of Contents
Why regular income is important
Chris has a business selling widgets. Sometimes business is good, but sometimes the sales just trickle in.
For a given six month period, here is the income that Chris earns from the widget business:
- January: $2,000
- February: $1,500
- March: $500
- April: $2,000
- May: $6,000
- June: $3,000
Now, as a solopreneur, Chris can just consider the business income as personal income. But then look at the problem: on some months the income is semi-consistent, but on others there’s feast or famine. How is Chris going to pay the bills in March, when the income is so low? And what is Chris going to do with all that money in May?
Regular income allows you to plan your financial life. You know how you’re going to pay the bills. You know what next month is going to look like.
So how do you make this happen?
You are not your business
The first step is more mental than anything else; you need to stop thinking of your business income as your personal income. You need to separate that out in your head.
Once you do that, then you realize that your personal income is actually zero. Why? Because you as a business owner have income into the business, but you haven’t paid your employee yet (that’s you).
Zero income isn’t a good thing to have, so it’s time to fix this. But how?
Remember, you need to think both as a business owner and as an employee, and know who you’re thinking as at any given time.
How much can you afford to pay?
You-as-employer need to decide how much you can pay you-as-employee.
And there are a number of ways to do this. Among them:
- Average: You can take the average of your business income for the most recent months or years, and that becomes the salary.
- Bills and Expenses: You-as-employee determine what your Bills and Expenses might be for an average month, and then you-as-employer make that your salary.
- Average-minus: You can take the average of your business income and then reduce it a little bit for your salary, so that you keep adding a bit of savings to your business.
Your business needs float
That last point above is important, because while you-as-employee need income to live, your business also needs a reserve of money to be able to pay the salary. This whole thing breaks down if your business needs to pay out more in salary than it has in reserve!
This is the same concept of “float” that I’ve talked about for personal expenses. Your business needs float too, so that it can pay out more than it makes periodically, at least in the short term.
Take Chris’s income above. The average for those six months is $2,500, so if we give that out in salary, we’ll immediately have a problem in the first month.
And if we reduce that income to only $2,000, we’re fine for a month, but everything comes crashing down in month #3.
But, if we have, say, $5,000 in business float, then both a $2,000 and a $2,500 monthly salary is just fine. The float allows you to have a cushion against lean months.
This all assumes, of course, that your business has float. If your business doesn’t have float, then that’s your first order of business. Work to leave a little bit extra in your business account each month, and let that grow over time. That’s the key to making regular income work.
I won’t lie; it took me a while to get enough float in my account to feel comfortable. But it’s so worth it to be able to give myself
Give yourself a cushion
And ultimately, a cushion is what this is all about. Giving yourself a regular income allows you to plan better, while giving your business a little bit of reliability as well. With float, your business will be able to weather the ups and down more easily of running your business.
The important thing here, above all else, is that you are not your business. It is a separate thing, and once you start to treat it like a separate thing, everything else will start to fall into place.
