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How Do I Pay Myself? August 19, 2009

Posted by Julie Duriga, CPA in Small Business, Uncategorized.
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j0438810This 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

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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Comments»

1. Terri Hilbrant - November 18, 2009

If you can answer this question I woul be so Thankful. I am trying to find out in a general partnership with four Partners can you pay some of the partners an hourly rate actually we pay our drivers a commission rate of 25% of what the truck grosses so that’s what I am wondering can we pay some of the partners the same way or do all partners have to be paid a fixed salary? Also if I a partner wanted me to withhold taxes from their check and place it in a savings acct for the end of the year could that be done as well? I hope that you can help me with these questions but if not Thank you so much for your time. THANK YOU, Terri Hilbrant. Hilbrant trucking. Oh I’m in California if that makes a difference

Julie Duriga, CPA - November 18, 2009

The IRS website is difficult to understand on this question, especially for partnerships! You can’t run payroll per say on general partners. You can pay your partners a draw or a guaranteed payment. The partner is responsible for remitting the social security and income taxes. The partnership can certainly hold back and set it in a savings account for the partner but utimately, the partner sends in their tax payments under their own social security number. Let me know if this helps! Any more questions? Just let me know…

2. Tiffany - December 12, 2009

Julie,

Do you know if it makes a difference whether an officer of a corporation is paid once a month or semi-monthly? What about salaried vs. hourly? I know that there are requirements for salaried employees, but do they apply to an officer of a corporation?

Thanks in advance for your reply!
Tiffany

Julie Duriga, CPA - December 13, 2009

Hello Tiffany,
Your question is so good! I will respond to your concerns in my blog post.
If it doesn’t answer the question, please let me know.
Thanks again,
Julie

3. Randy McDole - December 10, 2010

So if I write a check to my personal account from my LLC (multi-member) account this will not negate the liability protection of the LLC? Or is that determined by how I report it to the IRS?

Thanks in advance for the help.

Julie Duriga, CPA - December 11, 2010

Do you know if under your LLC are you a partnership or an S Corporation? I have a blog about the LLC question…you might want to read that. Once you know if you are a partnership or S Corporation, I have another blog post about that. If those don’t answer your questions, you might also want to download my free e-book on my website. I also have a twenty minute video that costs 6.99 that uses cartoons to explain this topic. If none of those work for you, please write me back and I am happy to help with this.
I hope all is well in your small business. Remember, please write back if you are unclear. I am happy to help!
All the best,
Julie

4. Van - January 5, 2011

We have a restaurant. We have a business account and a personal account. My husband has not been paying himself on a regular basis just drawing from the business account. I dont know how to deal with this for taxes and accounting purposes. We do have a personal account. If I transfer or “draw” from the business account into the personal account, how are we taxes by the state and fed on those draws? Does it work against us to to that transfer? If anyone has a good link to help me understand this process I would greatly appreciate it. By the way I have Quickbooks and have two different company files, the personal finances file and the restaurant file.

Thank you!!

Julie Duriga, CPA - January 5, 2011

Hi,
I have a free book download on my website…look through the book and that will help you answer your questions. I also have a little video that is 20 minutes long that costs 6.99 that answers the questions about how draws are taxed.
Visit http://www.UniversityForBusiness.com for your free e-book. If that doesn’t help, let me know…
Julie


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