Should I Be Paying Myself via Payroll?
A common question we field from our new clients is related to how and when they can pay themselves. And of course, the answer is dependent on several different factors. First, consider your legal entity. Second, consider your cash flow and profitability. Here are some basics:
- S-Corp owners should put themselves on payroll once their business is profitable. Payroll taxes are withheld on their wages just like any other employee. The wage they take should be a reasonable amount for their job title and industry. If they would like to take a tax-free distribution, we can help determine when would be a good time.
- Sole proprietorship owners do not take a salary but can take money out of the business for personal use. This becomes an owner’s draw or distribution but is not a deductible expense. The owners pay self employment taxes on the total business net income.
- A Partnership must pay themselves with money taken directly out of the business instead of through payroll. Their pay is classified either as an owner’s draw or guaranteed payment, depending on your operating agreement. Owner’s draws must be equitable among all partners based on their percentage of ownership and are considered tax-free distributions. Guaranteed payments are similar to a salary. They do not have to be equitable among all partners. They do not have taxes withheld, so any partner receiving a guaranteed payment will need to pay self employment taxes. Many partnerships utilize both to compensate owners.
- A C-Corp owner can pay themselves via payroll and dividends.
If you need more assistance on identifying how you should be paying yourself in your business, feel free to schedule a call with Samantha.