It’s essential to ensure you’re paying yourself correctly from your business. The method you use depends on your business structure. Let’s explore the best ways to pay yourself based on the four main business structures:
1. Sole Proprietorship
As a sole proprietor, you are the sole owner of your business. All profits and losses are reported on your personal tax return. You can pay yourself by taking a draw from your business profits, which is not subject to payroll taxes. However, remember to pay estimated taxes on your income quarterly to avoid underpayment penalties.
2. Single-Member LLC
A single-member LLC is considered a pass-through entity, meaning your business profits and losses flow through to your personal tax return. You can pay yourself similarly to a sole proprietor by taking a draw from your business profits, which is not subject to payroll taxes.
3. Partnership
In a partnership, you and your partners share the profits and losses of the business. You should pay yourself through guaranteed payments or distributions. Guaranteed payments are similar to a salary and are subject to payroll taxes. Distributions are a share of the profits made by the partnership and are not subject to payroll taxes.
4. S or C Corporation
As a shareholder in an S or C Corporation, you are considered an employee of the business. You should pay yourself a reasonable salary, which is subject to payroll taxes. Additionally, you can receive distributions from the profits of the corporation, which are not subject to payroll taxes.
Final Thoughts
Paying yourself from your business is not a one-size-fits-all approach and depends on your business structure. It’s crucial to work with a professional to ensure that you are paying yourself appropriately and legally.
