Paying yourself a salary

It’s safe to say that we all want to make money from our business, but how do we get that money out of the company.  The short answer is that is depends on the type of company you have.  If you haven’t already please check out the previous article, Choosing a Business Entity.

Let’s go through how to pay yourself depending on which entity you have.

Sole Proprietors, Single Owner LLC and Partnerships

Write yourself a check or transfer to your personal bank account! That’s it.  The entities listed above are not allowed to have actual salaries, meaning a pay stub with a W-2. 

These entities take what is called “a draw”.  They draw money out of the company as needed.  Also remember, these entities are also subject to self-employment tax on top of income tax. So please factor that in before you draw the money. 

The money taken as a draw is not included in business expenses and is not a deduction. 

S-Corporations

Write yourself a check and set up payroll.  S-Corporations that have been in existence for more than 3 years are required to take a salary on payroll if there is enough profit to do so. 

The portion that is set up on payroll is subject to 15.3% self-employment tax, but a tax planning opportunity is here.  This is the reason many choose to be taxed as an S-Corp.  Let’s say Irene is in year 3 of business and it’s progressing.  She wants to take a total salary of $50,000.  If she takes the entire salary through payroll, self-employment tax will total $7,650 ($50,000 x .153). 

As an S-Corp, she can take a reasonable salary of let's say $30,000 and the remaining $20,000 can be taken as a draw.  She then saves $3,060 ($20,000 x.153) in tax because the draw is not subject to self-employment tax when a business has S-Corp status.

Note: Setting up payroll requires employment taxes to be sent to the government and quarterly tax payment to be filed.  If feel you are ready to set up payroll and receive a W-2 each year it’s best to speak with an accountant first.  Feel free to schedule a call with me.

Corporations

Set up payroll.  That’s the only way to take substantial money out of a c-corporation.  C-corporations also pay dividends but those are taxed twice. 

That’s it. Paying yourself a salary doesn’t have to be complicated.  If you have any questions feel free to leave a comment or schedule a call.