As a self-employed individual, the IRS sees your company's profit as synonymous with your earnings. But just because your business makes money on paper does not necessarily mean that you have funds available to pay yourself. Paying yourself out of the income that your business earns involves developing an ongoing sense of how much your company is making as well as how much cash you can spare to cover your personal expenses. To pay yourself with self employment, you must also be willing and able to change your strategy regarding your personal draws if your business cash flow situation runs into difficulty.
Create a cash-flow projection to predict the funds your business will have available during the upcoming year. Use a spreadsheet format, dedicating a column for each month of the year. Also divide the sheet horizontally, using the upper portion to list each source of capital you will have available including cash in the bank, income from business expenses and revenue from loans. Use the lower part of the page to list each category of money flowing out of your business, including rent, payroll, materials, supplies, taxes and loan payments. Add the various sources of cash that your business will have available as well as the different types of expenses month by month.
Subtract your expenses from your available capital to calculate your net cash flow month by month. Evaluate your personal financial needs and decide how much of the capital you predict having available you will dedicate to paying yourself. Do not use all of your spare cash for personal expenses because this will leave your business without discretionary capital in case of emergencies.
Write yourself a check for the amount you have determined each week or each month. Keep track of these personal draws but do not list them as business expenses as you would rent or payroll because the IRS does not count them as allowable deductions.
Track your business income and expenses during the period during which you have created your cash flow projection. Evaluate whether you are actually earning the sums you predicted and whether you indeed have the cash flow you anticipated when you decided how much to pay yourself. Adjust the amount of your personal draw if you find that you cannot afford to pay yourself as much as you thought, or if your business earns a higher profit than you expected.