So, you started a business, put in the grind, landed some clients, and the money’s finally rolling in. Congrats – there’s nothing sweeter than seeing all your hard work pay off!
And let’s be honest, being profitable is a huge weight off your shoulders – you’ve got the funds to cover your company’s bills and pay your employees on time. But like anyone else at your business, you need a paycheck, too. Bills don’t magically disappear just because you run the place – we wish!
That brings us to the big question every business owner faces – how do you pay yourself for the work you do? Well, that’s simple, right? You make money, send some to your personal account, and voila – you’re paid just like everyone else.
Not so fast! When you’re the boss, there’s a little more strategy (and a few tax twists) involved. Understanding your obligations is super important – if you want to pay yourself in a way that keeps you fully compliant with IRS rules and allows you to pay income tax correctly, that is.
The good news? We’re breaking it all down in this guide – so you’ll know exactly how to pay yourself the right way, enjoy tax savings, and keep the IRS off your back.
Options to pay yourself as a business owner
As your own boss, paying yourself should be really simple right? Well, not quite.
The way you pay yourself depends completely on how your business is set up. Each business structure has its own unique set of tax rules. These rules determine what kind of pay you’re allowed to take, making things a bit tricky.
But don’t panic, because we’ve broken them all down in a way that’s easy to understand. Let’s go over what payment looks like for each one.
Sole proprietors and partnerships
If you’re a sole proprietor or part of a partnership, you and your business are basically the same in the eyes of the IRS. That means you can’t put yourself on payroll or pay yourself a W-2 salary.
Instead, you take what’s called an owner’s draw – pulling money out of your business profits whenever you need to pay yourself. You’ll still pay taxes on your total profit at tax time, not when you take the money out.
S-Corporations
Payroll is a bit more structured for S-Corps. The IRS requires you to pay yourself a reasonable salary for the work you do, which means running it through payroll with the proper taxes withheld.
Once that’s taken care of, you can pull extra profits out as owner’s draws (also known as distributions). The best part? You don’t have to pay self-employment tax on those distributions – a nice little win for S-Corp owners.
Just be sure to track your shareholder basis carefully. If you accidentally take out more than your basis allows, you could end up owing extra taxes. Keeping those records up-to-date will save you from any surprises.
You can even skip the salary in a few cases, like if your business isn’t really active yet or you’re not taking any distributions.
C-Corporations
If you run a C-Corporation, you’re officially an employee of your business – which means you have to pay yourself a salary through payroll.
Once that’s set, you also have the option of taking dividends from the company’s profits. Dividends are separate from your salary and are taxed differently – usually at a lower rate.
You can skip the salary if you’re just a passive investor or not really involved in daily operations, but that’s rare for small business owners.
Wrapping up
Alright, business owner, the key takeaway today is that how you pay yourself depends entirely on the way your business is set up. If you’re a sole proprietor or partner, you take owner’s draws. S-Corp owners start with a salary and can then pull distributions. And C-Corp owners? You’re officially an employee, drawing a salary and maybe grabbing some dividends on top.
Tax Savvy Advisors has your back no matter how you’re paid
Figuring out how to pay yourself, keep personal and business finances separate, and maximize your tax savings is no easy feat!
Our tax specialists help small business owners pay self-employment taxes while keeping as much of their hard-earned money as possible – always staying fully compliant with the IRS.
From finding the smartest way to pay yourself to making the most of every deduction – gas, office supplies, or anything in between – we make sure your profits are protected.
We believe you should be able to enjoy running their business without taxes raining on your parade. Take our Fit & Pricing Quiz to find the package that fits your needs.
