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What Is The Best Way To Pay Myself In My Business? January 17, 2010

Posted by Julie Duriga, CPA in Uncategorized.
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I am grateful to have had lunch with my friend Barbara last Thursday.  I met Barbara about three years ago and I am so grateful she is my friend.   I met Barbara because I was starting my CPA practice and I was looking for a payroll solution for all of my potential clients that I was going to have.  Barbara works for PayChex.

I have since sold my practice and I am astonished everyday at how many people still want to be my friend.  I thought many friends would vanish once I was no longer working in public accounting, this has proven not to be true.  Barbara is someone who has stuck with me through thick and thin and has done an amazing job in Western North Carolina providing businesses with payroll services.

Barbara told me at lunch on Thursday that S Corporation payroll through PayChex is $39.99 per month.  I just about fell out of my chair.  This is a unbelieavable deal for payroll.

I believe running payroll through PayChex will help small businesses stay out of trouble with the IRS.  Using PayChex for your payroll will keep you disciplined inside your S Corporation to make sure you pay yourself.   Not providing compensation to active officers inside an S Corporation is a HUGE red flag for the IRS.  Even if it is a small amount every month, it keeps the zero out of a box where the IRS likes to see an amount.  Remember, to run one paycheck carries with it the same burdens as running fifty checks.  There is really no such thing as “but is just one paycheck”.

I believe PayChex by offering payroll services for $39.99 is offering America its own economic re-investment recovery act.

I am not compensated by PayChex in any way except that Barbara takes me out to lunch about once every quarter.  I am passionate about small businesses and believe that small business owners are the true heroes of our economy.  I see this as a fundamental service that will free small business owners up to do what they love to do!  Worrying about payroll is silly when it is so affordable and so well done byPaychex.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

How Do Partnerships Pay FICA? January 2, 2010

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Partnerships don’t pay FICA tax for their partners.  If a partnership employs people, then, of course, the partnership must pay FICA taxes on their employees.  Partners in the partnership must pay their own FICA taxes as well as their own income taxes.  Some partnerships do run payroll on their own officers but the IRS doesn’t really care for this.  It may come back to the haunt the officers at a later date.

When partners take a draw, distribution or a guaranteed payment, they must take out a gross amount of say 1000.00.  From this, they must set aside 200-300 (depending on your personal situation) to pay their own estimated quarterlies.  Partners in the partnership must submit their own 1040-ES to the IRS on a quarterly basis for their taxes. 

FICA and income tax is a different tax.  When you send the IRS one chunk of cash, the IRS puts this in your account and the amounts that are figured out when you file your personal 1040.  Remember the profits inside the partnership are subject to your income tax rate even if you did not bring those profits home with you. 

Guaranteed payments taken as “take home pay” is subject to both your income tax rate and to FICA taxes.  Partnerships are similar to sole proprietorship because the partners have to pay the full 15.30% of social security/medicare tax.  FICA=Social Security/Medicare Tax.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

Can I Pay Myself Dividends In My S Corporation? December 20, 2009

Posted by Julie Duriga, CPA in Uncategorized.
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Can I pay myself dividends in my S Corporation?  Yes!  You can pay yourself dividends in your S Corporation.  If you are actively working your S Corporation, you should pay yourself a salary.  As mentioned in the previous blog post, “Requirements For Officer Compensation” the business is required to run payroll on the officers.  This means that the S Corporation should treat the officers as employees and pay unemployment insurance, payroll taxes and do the withholding on the officers.  This salary should be a reasonable amount for your industry.

Dividends are fun because they are taxed at your personal income tax rate.  They are not subject to social security and medicare taxes.  Dividends should be a smaller percentage of salaries paid to officers than the salaries are paid at.  Dividends might be 20% of salaries and officer payroll would be 80% of overall distributions.  If you paid your officers $100.00, you might put $20.00 throught dividends and $80.00 through payroll.  This would be a safe bet…of course, check with your own CPA or accountant for further assistance in this area.  You need professional, individualized help with this question, I am throwing out a ball park figure for you to get started.

Dividends are not a deduction on the business profit and loss statement.  Dividends are effectively a reduction of cash and not a reduction of profits.  Dividends come out of your profits.  If your business has $10.00 in profits, and you have $10.00 in the bank, you can pay yourself a $10.00 dividend.  You are still reporting $10.00 in profits to the IRS.  The only way to have this $10.00 be deductible is to run this amount through your payroll system.

Visit www.UniversityForBusiness.com for more helpful resources on running your small business.

Requirements For Officer Compensation…. December 13, 2009

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This was a question that a blog reader asked me.  It is so useful when readers ask questions because it gives me material to write about.  So keep your questions coming.

I usually suggest that active officers run payroll on themselves at a minimum once a quarter.  Even if the business can only afford to pay the officers through payroll $500.00 per quarter, that is better than nothing.  This makes the business look more like a “going concern” (a real business that is sustainable) to the IRS than if there is an absence of payroll inside the corporation for its active officers.  The IRS starts to wonder why would the officers stay in this business if the business can’t afford to pay its own officers after a period of time. 

The only requirement that I know of is that officers must be compensated by giving them a reasonable salary for your industry.  If your S Corporation is a restaurant, then the business must compensate the officers who work inside the restaurant a reasonable salary for the restaurant industry.

What is an active officer?  This is an officer who works inside the corporation.  An officer who reviews the financials on a weekly basis or an officer who actively generates sales calls or an officer who does the dishes is considered active.  If the business has officers who show up every now and then for board meetings or who stops by occasionally to check on their investment is not considered active.

In my state of North Carolina, the power of the payroll law rests with the employer.  The employer can really do whatever they want to do with their employees as far as paying frequency.   I don’t know of any employer that pays its employees less than once a month.   Check with your state department of revenue for your state’s payroll laws.

Officers can be compensated on a different schedule than its employees.  Sometimes when there is no money, the employees get paid first and the officers just have to wait.  Of course, it is easier to run payroll all at the same time, but sometimes this is not possible.

 In conclusion, the officers can be compensated whenever the Corporation deems appropriate.  At at minimum, the compensation should occur at least once a quarter.  The IRS requires that active officers be compensated a fair and reasonable salary.  Employees and officers can be compensated on the same schedule if the funds permit this.  Be careful of paying your officers with fringe benefits.  Fringe benefits to S Corporation officers are usually considered compensation by the IRS and have to be added to the W-2 as taxable wages.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

Do I Pay My Income Tax Bill From My Business? December 6, 2009

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Of course, income taxes are different than unemployment taxes and from the employer’s portion of the social security tax.  Those taxes are deductible.

Income taxes are held from your own income and need to be paid from your salary bucket inside your business.  If your paycheck says that you took home 700.00, then 300.00 is really taxes.  In t heory your paycheck should be 1,000.00 to cover taxes which is normally around 300.00 to be safe.  To be safe means you are not stuck with an enormous tax bill at the end of the year.

If you are a sole proprietor or a partnership then your taxes are paid from the guaranteed payments or from your owner’s draw.  This draw can take place through a physical check written from your business or through a bank transfer from your business account to your personal account.  It is then your responsibility to remit quarterly your income taxes and your social security taxes to the IRS and to the state agencies.  Those taxes are paid from the money that was transferred to your business account.  Some business gross up their partner’s draws and guaranteed payments to cove the cost of the taxes.  Instead of bringing home $1,000.00, they might bring home $1,300.00 to cover the taxes.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

My Company Isn’t Profitable…Do I Have To Pay Taxes? November 28, 2009

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My Company Isn’t Profitable…Do I Have To Pay Taxes?

No!  If your company isn’t profitable you do not have to pay income taxes.  If you have employees or you are an employee, you will have to pay social security/medicare taxes.

I believe the IRS doesn’t really start looking closely at your business until after three unprofitable years.  If you have been unprofitable for three years, the IRS starts to wonder why are you still in this business?  Is this a business or a hobby?  Then you start to get into the whole concept of hobby losses. 

If you are unprofitable for three years, start looking at your numbers…your gross profit, your percentage of payroll to revenue (if your payroll is 60K and your revenue is 100K, that means your payroll is 60% of your revenue…that is too high, your staff needs direction or they don’t have enough to do or something).  Maybe you need a new business or a new way to operate your business?

Your salary is deductible if you are an S Coporation or a C Corporation.  Your guaranteed payments or draws are deductible to the partnership.    Your draws inside your sole proprietorship are NOT deductible.  If you are an LLC, check out my blog on the whole LLC scene.  This means that your profits will be lower…which is good for tax purposes…to report lower profits…the lower the profits the lower your tax bill.  Lower profits is bad for bank loans though.  Do you want a bank loan or do you want to pay less in taxes…you can’t have both.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

Small Business Help… November 24, 2009

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I had lunch with Sharon Oxendine last week.  Sharon is an amazing friend and is passionate about small business and every client she serves.  Sharon is the director of the Women’s Business Center in Asheville as well a regional director of Mountain BizWorks. 

What is Mountain BizWorks?  I am always surprised at the number of small business owners who are not aware at the level of assistance that is available to them in their own community.  Mountain BizWorks is a small business incubator.  The cornerstone of Mountain BizWorks is the Foundations class.  What is the Foundations class?  We break down the business plan into seven weeks and help small business owners understand and write their business plan.  The business plan should start at thirty pages which is daunting and difficult if it is something that you have never done before. 

Of course, I believe that Mountain BizWorks is the best in the world at helping small business owners.  Our Asheville small business incubator offers many other services such as business coaching and professional assistance from lawyers, accountants, marketing experts and a wealth of other knowledge is always prepared to assist.

Look around your community for resources to assist you in your small business.   Your community may have a SCORE office or you might be lucky enough to live in Western North Carolina and be able to work with Mountain BizWorks.  There might be a similar small business incubator that is waiting to help you!  If you ask for help, you will be amazed at all of the people who want to see you succeed.  Just Ask!

Look around your community for similar resources to assist you in your small business.  Sometimes, just another set of eyes is all it takes to shift your direction and pave the way for prosperity. 

Visit www.MountainBizWorks.org for more information and for all of the small business help you could possibly ask for!

Do I Pay Taxes In My LLC If I Wasn’t Paid? November 16, 2009

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j0439255A better way to ask this question is “Was I profitable?”  rather than “did I get paid in my small business?”  The short answer to this question is if you were profitable, then yes you will be taxed on those profits!  The government doesn’t really care if you brought those profits home via payroll or owners’ draw or if you left them in your business, it is still considered taxable income to you, if you are profitable. 

Depending on your filing status of your LLC, this determines the degree to which your profits will be taxed.  If you are partnership or sole proprietor, then your 100% of your profits will be taxed for social security and medicare.  If you are an S Corporation underneath your LLC, then your business profits will be taxed at your regular income tax rate.

The answer to your question is: you pay taxes if you were profitable.  Your income statement or profit and loss statement will let you know if you were profitable.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

Do I Have To Pay Myself In An LLC? November 14, 2009

Posted by Julie Duriga, CPA in Uncategorized.
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Windpower old and newOf course, any good CPA would start with a disclaimer that this blog post is not intended to render legal or accounting advice…my hope is to get you started with some general knowledge…

To be straightforward and to the point…yes, you should absolutely pay yourself in an LLC if you are registered with the IRS as an S Corporation.  The payroll rules for LLCs filing as an S Corporation are very clear and state that you are an employee of your S Corporation even if you are the only employee of the S Corporation.  The IRS doesn’t understand why someone would stay in business for more than three years if you are not making any money.  Repeated losses year after year increases your audit risk.  Payroll in almost every state requires that you pay unemployment insurance and state withholding taxes.  An LLC filing as an S Corporation should run payroll at least once a quarter and submit some funds to the IRS and to state agencies even if the amounts are nominal.

For LLCs filing as a sole proprietorship or as a partnership…your status requires that you take draws and that you make your estimated payments to the IRS for your social security and medicare.  See last week’s blog on paying yourself inside a sole proprietorship.  The rules are similar for a partnership!

It is absolutely critical that you know without a doubt your filing status with the IRS.    There is no federal tax form for the LLC.  When you filed for your Employer’s Identification Number, you elected your filing status or if your attorney filed your paperwork for you, ask your attorney what you are filing with under the LLC.

This seems really complicated but if you spend a little time with this, you will understand!  Have no fear!  Spend some time digesting and pondering this information and it will begin to make sense to you, even if it doesn’t right now, it will eventually!

How Do I Pay Myself as A Sole Proprietor? November 7, 2009

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j0438810If you have established yourself as a sole proprietor inside your small business, paying yourself is relatively easy!  The tricky part, of course, is the estimated tax payments.

Of course, you would need to be profitable in order to be able to pay yourself, there needs to be excess cash in your business accounts after you have met all of your small business expenses.  All of the small business experts will tell you that you need to pay yourself first.  I agree with this statement, you must take care of your household expenses first, otherwise what you have is an expensive hobby.  However, sometimes, it is incredibly difficult to let the business expenses slide because we see our small business as the goose that lays the golden egg…if we can just through the next month, things will be great!  I know, I have been there. 

Assuming your small business is enormously profitable (and I hope that it is), you have excess cash to pay yourself…If your business account and your personal accounts are at the same bank then online transfers from the business accounts to your personal accounts are the way to go.  I would always recommend setting up a separate business savings account to set your tax money aside.  If you don’t have online access to your accounts, then is fine to write a check from your small business account to your personal accounts.

For example, you want to pay yourself, $1,000.00 as a small business owner, you would really only bring home about $700.00 after taxes.  The online transfer would be two part-$700.00 to your personal checking account and $300.00 to your tax savings account.  Depending on your tax bracket and if you don’t have a great deal of other personal income (25%-30%) should cover you come tax time. 

Seems high doesn’t it?  Yes!  We do pay a lot of taxes as small business owners…Dave Ramsey says that if we weren’t so busy keeping our doors open of our small businesses we as small business owners would have a revolution.  I agree, when we are working for other people, we don’t notice the tax bill as much because it is being withheld from our paycheck but when we have to write a check to pay our taxes, it might make you sick to your stomach!

Caution!  It is very important to remember that just because you did not bring all of your profits home with you DOES NOT mean you don’t pay taxes on those profits!  If you have $10,000.00 in profits at the end of the taxable year, that is considered taxable income to you and you will have to pay taxes on these profits to the tune of about $3,000.00!  It is remarkable because it may feel as though you did not benefit from these profits, but it is the law to pay taxes on your profits and what you put into your personal bank account.

 Remember, that if you are an LLC, you may also be a sole proprietor…the federal government doesn’t recognize the LLC only the sole proprietor.  You may be registered as an LLC with the state but you still remain a sole proprietor with the federal government.  You would declare yourself, “I am an LLC filing as a sole proprietor”.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

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