Running a tattoo shop is a massive achievement. You have built a space for artists to thrive and clients to get amazing work. But when it comes to your own money, things can get confusing. Many shop owners struggle with a simple question. How do you actually pay yourself?
You might be tempted to just take cash out of the register when you need it. Or maybe you transfer money from your business account to your personal account whenever rent is due. This approach creates chaos for your bookkeeping and your taxes. It also makes it impossible to know if your shop is truly profitable.
Paying yourself correctly is crucial for your financial health. It helps you build personal wealth while keeping your business secure. In this guide, we will break down the different ways to pay yourself. We will look at how your business structure affects your pay. Finally, we will give you a simple framework to decide exactly how much you should take home.
Owner Draw Versus Salary
There are two main ways to take money out of your business. You can take an owner draw or you can pay yourself a salary. The method you use depends entirely on how your business is structured legally.
An owner draw is simply a transfer of money from your business bank account to your personal bank account. You are drawing from the equity you have in the business. When you take a draw, taxes are not withheld at that moment. You will pay taxes on your total business profit at the end of the year, regardless of how much you actually drew out.
A salary is different. When you take a salary, you are treated like an employee of your own business. You run payroll on a regular schedule. Taxes are withheld from your paycheck before the money hits your personal account. The business also pays its portion of payroll taxes. Your salary is considered a business expense, which lowers the overall profit of the shop.
How Your Entity Type Changes Things
The IRS has strict rules about how you can pay yourself based on your business entity. You cannot just choose the method you prefer. You must follow the rules for your specific structure.
Sole Proprietorships and Single Member LLCs
If you operate as a sole proprietor or a single member LLC, you are not allowed to pay yourself a salary. You cannot put yourself on payroll. Instead, you must use the owner draw method.
You simply transfer money from your business checking account to your personal checking account. You should label this transfer as an owner draw in your bookkeeping software. Remember that you will owe self employment taxes and income taxes on the total net profit of your shop. You need to set aside money for quarterly estimated tax payments every time you take a draw.
Partnerships and Multi Member LLCs
If you own the shop with a partner, you generally take guaranteed payments or partner draws. Like a sole proprietor, you cannot be a W2 employee of your own partnership. You will pay taxes on your share of the partnership profits.
S Corporations
If your business is taxed as an S Corporation, the rules change completely. The IRS requires you to pay yourself a reasonable salary through payroll. You must withhold taxes just like you would for any other employee.
Once you have paid yourself a reasonable salary, you can take additional money out of the business as distributions. These distributions are not subject to self employment taxes. This is why many successful shop owners choose the S Corporation structure. It can save you a significant amount of money on taxes. However, you must run formal payroll to stay compliant.
The Importance of Consistency
No matter which method you use, consistency is the key to success. You should treat your pay like any other fixed business expense. Decide on a set amount and transfer it on a regular schedule.
Taking random amounts of money whenever you feel like it is a recipe for disaster. It makes it impossible to budget for your personal life. It also drains cash from your business unpredictably. When you pay yourself a consistent amount on the first and fifteenth of every month, you create stability. You know exactly what you can afford personally. Your business knows exactly what its cash flow will look like.
A Simple Framework for Setting Your Pay
Figuring out the exact dollar amount to pay yourself can feel overwhelming. You want to take home enough to live comfortably, but you also need to leave enough in the business to cover expenses and taxes. Here is a simple framework to help you decide.
Step One: Calculate Your Personal Needs
Start by looking at your personal life. Add up all your monthly living expenses. Include your rent or mortgage, groceries, utilities, car payments, and personal insurance. Add a little extra for entertainment and savings. This total is your absolute minimum baseline. Your business must generate enough profit to cover this number.
Step Two: Analyze Your Business Profit
Next, look at your business numbers. Calculate your average monthly revenue over the last six months. Subtract your average monthly operating expenses. This includes shop rent, supplies, software, and utilities. Do not forget to subtract the money you need to set aside for taxes. The number left over is your true monthly profit.
Step Three: Find the Sweet Spot
Compare your personal needs to your business profit. If your profit is much higher than your personal needs, you have room to breathe. You can set your pay comfortably above your baseline and leave the rest in the business for growth.
If your profit is exactly equal to your personal needs, you need to be careful. You should pay yourself just enough to survive while you work on increasing shop revenue. If your profit is lower than your personal needs, you have a serious problem. You either need to cut personal expenses or drastically increase your shop income.
Step Four: Set a Percentage for Growth
A healthy business should retain some earnings. Do not drain every single dollar of profit into your personal account. Try to leave at least ten to twenty percent of your profit in the business bank account. This creates a safety net for slow months. It also gives you capital to upgrade equipment or hire new artists.
Keep Your Finances Separate
The most important rule of paying yourself is maintaining strict separation between your business and personal finances. Never pay for personal groceries with your business debit card. Never pay shop rent from your personal checking account.
When you mix your money, you pierce the corporate veil. This means you could lose the legal protection your LLC or corporation provides. If the shop gets sued, your personal assets could be at risk. Always transfer your pay from the business account to your personal account first. Then, pay your personal bills from your personal account.
Adjusting Your Pay Over Time
Your pay is not set in stone forever. As your shop grows, your pay should grow too. Review your numbers every quarter. If the shop is consistently generating more profit, you can give yourself a raise.
If the shop hits a slow season, you might need to temporarily reduce your pay. This is why leaving a cash buffer in the business is so important. A healthy reserve allows you to maintain your personal income even when shop revenue dips.
Get Professional Guidance
Navigating owner draws, reasonable salaries, and tax implications is complicated. Making a mistake can lead to massive tax penalties. You do not have to figure this out alone. Working with a specialized accountant ensures you are paying yourself in the most tax efficient way possible.
We help tattoo shop owners structure their businesses for maximum profit and minimum tax liability. We can help you determine the perfect amount to pay yourself while keeping your shop financially secure.
Ready to take control of your shop finances? Apply to work with us today and let us build a custom financial strategy for your business.