Purse Strings Approved Professional Blog Series
How Business Revenue Becomes Personal Income
By: Guli Fager, CFP®, MPH, Financial Advisor at Toler Financial Group, LLC
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.
Final Thoughts
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.
Guli Fager, CFP®, MPH
Financial Advisor at Toler Financial Group, LLC
As a teenager Guli worked summers for a financial newsletter and read the Wall Street Journal. But in college, she didn’t herself reflected in the world of finance and she went in a radically different direction—into sex ed.
But it turns out sex and money aren’t that different—both things are extremely important in our culture and yet taboo to talk about. Shame, embarrassment, and secrecy can make it difficult to be honest about them and to make good decisions regarding our sex lives and finances. With nearly 20 years of experience as a sex educator, coach and trainer working with folks of all ages, she brings the same commitment to transparency, fun, and evidence-based learning and behavior change strategies as a financial advisor.
Check out the background of these financial professionals on FINRA’s BrokerCheck
This website is for informational purposes only and does not constitute investment advice nor a solicitation to buy or sell any security or engage in a particular investment strategy. Toler Financial Group provides advisory services through Rossby Financial LLC, a Registered Investment Adviser with the U.S. Securities and Exchange Commission. Information contained herein is provided by sources deemed to be reliable; however, accuracy and completeness cannot be guaranteed. All investing involves risk, including the possible loss of principal. Results are not guaranteed, as past performance does not indicate future results. Rossby Financial LLC and its affiliates do not provide tax or legal advice. Advisory services are offered in all 50 states.
Toler Financial Group does not provide tax or legal advice.
