How to Pay Yourself Smarter and Reduce Taxes

A Contractor’s Guide to Keeping More of What You Earn

Class Objective

To help contractors understand the right way to pay themselves, separate business and personal income, and structure payments for maximum tax efficiency and long-term financial stability.

Lesson Summary

Many contractors start their business by simply transferring money from their business account to their personal account whenever they need it. That approach works when you’re just beginning, but as your business grows, it becomes risky and expensive.
This class teaches you how to pay yourself the right way — through clear systems, payroll planning, and tax-efficient strategies — so you can save thousands of dollars every year while keeping your books clean and professional.

(A Five-Part Homeowner Education Series)

Video Explanation

Step 2: Set Up a Clear Payment System

A clean payment structure protects your business, reduces confusion, and helps you plan your cash flow.

Action Items:

Open two separate business accounts — one for operations and one for tax savings.
Determine a monthly base salary that matches your role’s fair market value.
Use payroll software such as QuickBooks Payroll, Gusto, or ADP to pay yourself consistently.
Document every owner draw, paycheck, and distribution to maintain IRS-compliant records.
Automate your payroll schedule once income becomes steady.

Step 3: Use Payroll to Unlock Tax Advantages

When you pay yourself properly, your business gains deductions, and you save money on self-employment taxes.

Action Items:

Set your salary to a “reasonable” level — not too low to trigger red flags, but not excessive.
Categorize remaining profit as an owner distribution to avoid extra tax.
Record payroll expenses accurately in QuickBooks to lower taxable business income.
Reinvest saved tax dollars into high-value areas like marketing, insurance, or retirement.

Step 4: Build Your Tax Efficiency Strategy

Efficient tax planning means you’re never surprised at tax time.

Action Items:

Track all business expenses separately for accurate deductions.
Save 25–30% of net income each month in your tax account.
Use your S-Corp to balance salary + distributions for optimal tax reduction.
Contribute to a SEP IRA or Solo 401(k) to reduce taxable income.
Reinvest profits into deductible assets such as software, tools, and vehicles.

Step 5: Common Mistakes to Avoid

Avoid these costly errors that can trigger audits, penalties, or cash flow issues.

Action Items:

Never transfer random amounts between business and personal accounts.
Do not pay personal bills directly from your business card.
If you’re an S-Corp, always run official payroll — skipping it can raise IRS red flags.
Set calendar reminders for quarterly estimated taxes.
Avoid taking a salary so low that it appears unrealistic for your role.

Thank you for completing this Session!

Home Building Master Class | The Contractor Checklist

Final Action Items Summary

Review how you currently pay yourself and identify any gaps.
Open a business savings account for tax reserves.
Meet with your CPA or bookkeeper to establish a reasonable salary.
Implement payroll software and automate monthly payments.
Begin contributing to a SEP IRA or Solo 401(k) for tax-deferred savings.
Log every payment and tax-saving action inside your Contractor Checklist System.

Video Explanation

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