How to Pay Yourself as a Sole Proprietor

If you have started your own business, you might be wondering how to pay yourself.  

Do I need to set up payroll?  Am I allowed to just take money out of my business profits?  What about claiming it on my taxes?

When you are a sole proprietor (not incorporated), you don’t have to do anything fancy.  You are free to take out as much or as little money out of your business as you like.  

Why?  Because, in the eyes of CRA, you and your business are one.  Each year, CRA will calculate taxes on your net income (income minus expenses).  This is done on your personal tax return under your name, so that profit after taxes belongs to you.  

Keep in mind, the money you pay yourself is not a business expense. It comes from your business profits.

Also, remember that your business will need cash to grow.  If you take every last dollar out, you won’t have the cash flow to cover your business needs.

As a best practice, I highly recommend paying yourself as if you were an employee.

• Pay yourself the same amount regularly.  Start with a manageable amount and pay yourself every two weeks or monthly.

• Reassess often.  Is this amount leaving you with enough cash to run your business?  And is it paying you enough to cover your own personal expenses?  If not, it’s time to find out why and take action.

• Set yourself up for future success with good habits. If you are already in the habit of paying yourself regularly, it won’t be as difficult to transition into a corporate set-up in the future.

• Set aside profits for future growth.  If you are continually emptying your business of profit, you won’t have enough cash to scale up when wanted/needed.

Even if you’re just starting your business, developing good financial habits will help you have long-term success!