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

Posted by Julie Duriga, CPA in Uncategorized.
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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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