Once a business becomes profitable, most folks think they should be paying themselves a salary. Did you know you are not necessarily required to?
If your business is organized as a Corporation or an S Corporation, you are required to pay yourself a reasonable salary. Your federal and state income withholding and payroll taxes are withheld from this and deposited on a monthly or semi-weekly schedule. Some S Corp owners decide to do a single payroll for themselves at the end of December once they have a better picture of their company’s financials.
Sole Proprietors are different. It’s not required that you pay yourself a salary. Since your business is taxed on the total profits or losses, regardless of what you pay yourself, you can simply take money out and categorize it to Owner Draws. You’ll need to make quarterly estimated tax payments to make sure you aren’t hit with underpayment penalties though so it’s important to track your business income.
LLCs are a little trickier however. When you started your business you had the opportunity to select how you were going to be taxed. Single Member LLCs are, by default, taxed like a Sole Proprietor (they call it a “Disregarded Entity”). That is, your income and expenses will be entered on schedule C of your individual tax return. If you make more than a threshold amount, you’ll need to pay Self Employment taxes as well.
If your LLC is owned by multiple people, by default it is taxed as a partnership. The business will file an informational tax return and each person will report their share of income and expenses on their individual returns. Owners can again take owner draws that will affect their basis in their partnership interest.
If, however, when you started your business you elected to be taxed as a Corporation, you’ll need to make sure you are taking a salary. Talk to a local payroll specialist to find out what works best for you!