How Do I Pay Myself? August 19, 2009Posted by Julie Duriga, CPA in Small Business, Uncategorized.
Tags: entrepreneur, entrepreneurship, Small Business, small business management, Starting a small business, taxation, taxes
This is a question that I answer virtually everyday. Of course, every entrepreneur wants to get paid as often as we can and as much as our business can afford.
How you pay yourself depends on the business entity in which your business operates. Remember the LLC (Limited Liability Company) entity is only a state entity. There is no LLC federal tax form. If you have an LLC entity, you are in the eyes of the Internal Revenue Service a sole proprietor, partnership or S corporation. We say in the CPA business, they are an LLC filing as a sole proprietor. OR they are an LLC filing as a partnership. OR they are an LLC filing as an S Corporation. Make sure that you know what entity you are registered at the federal level, Sole Proprietor, Partnership or S Corporation.
- Sole Proprietor-You must have two separate bank accounts, one for your business and one for your personal affairs. When the business gets paid, that cash is deposited into your business account. When it is time for you to get paid, you can write yourself a check or transfer your funds over from the business banking account to your personal account. It is important that you leave money in your business bank account (even better to set up a separate savings account) to hold back your self employment taxes and any potential income tax you may have. (See blog post called “Put My Taxes Into Buckets, Please.”) In a sole proprietorship, when you pay yourself this is called an Owner’s Draw. If you have profits in the business, even though you did not bring those profits home with you, you will still pay both income taxes and self employment taxes on those profits. If you have employees, they can be run through payroll but you can’t run payroll on yourself in a sole proprietorship or inside of a partnership. Every quarter, you are required to make estimated self employment taxes.
- Partnership-Very similar to a Sole Proprietorship in that both profits and owners’ draws are subject to both income tax and self employment tax. There needs to be two business bank accounts and you can do a transfer or write yourself a check from your business account to your personal account.
- S Corporation and C Corporations-As an active officer of the corporation, you are required to write yourself a payroll check. There is some flexibility as to what how much we can pay yourself in dividends but it is an IRS red flag if there is no payroll for officers in a corporation. I love it when officers run payroll on themselves and receive a W-2. This makes for much less of a surprise at the end of the year at tax time. I personally converted myself to a Corporation entity so that I did not have worry about making those estimated payments throughout the year. I will get a W-2 this year. I may even get a small refund! There is a really nice change. I love Paychex for payroll. They are reasonably priced and do their work excellently! It doesn’t matter if you have just one person on your payroll, the complexities of payroll are the same if you have one person or twenty five people.
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
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