How Business Revenue Becomes Personal Income

By Guli Fager, MPH

So you’ve hung out your shingle, gotten some clients, and gotten paid—now what? One of the most popular questions in our webinar series for self-employed professionals is about what to do with the dollars you earn. This article will walk you through how to correctly manage business cash flow. 

Briefly: 

• Deposit Business money (revenue) into an account just for the business 
• Pay all business expenses out of the business account
• Set aside 40% of revenue after business expenses for taxes
• Revenue after expenses and taxes = Income

Money In 

However you get paid—whether it’s cash, credit cards, insurance company reimbursements, Venmo, Zelle, or checks—money to your business (revenue) needs to go into a separate account just for your business. If your business is structured as a sole proprietor, you can simply open a bank account with your own name that you keep independent from your personal, household funds. If you’re an LLC or other structure you will need to open an account with your business’s articles of incorporation. In this case, checks need to be written to “Business Name, LLC.”  

Taxes

Business expenses come out of revenue before it is taxed, so you want to set aside taxes after you have paid all business expenses. A good rule of thumb is to set aside 40% of all revenue after expenses to cover tax payments – FICA, Federal and State/Local. A separate business savings account can be an easy way to keep those tax funds clearly in their own account, and you should have enough to make quarterly tax payments when they are due. 

Retirement Savings

Self-employed people have to set up their own retirement savings plans. A simple and popular plan is a “SEP”. To save for retirement, in addition to the 40% you set aside for taxes, you may want to set aside an additional 10-20% of revenue after expenses to cover a SEP or other retirement plan contribution. After you have been in business a year or two, your accountant should be able to give you a more precise savings goal to aim for and our firm can help you set up a SEP retirement plan for yourself.  

Income

Business revenue becomes available for personal income after expenses and taxes are paid. You can take as much or as little of the left-over funds as you like—you can set up a recurring transfer for the same amount every month or draw funds from the business account only when needed. Having a consistent amount each month should make it easier for you to budget for your own vacation and sick paid time off.

Whatever your business looks like, we would love to help you figure out how to make it work for your household. You can schedule a free consultation with us anytime.