HOW DO I PAY MYSELF AS AN ENTREPRENEUR?

Owning a business is a remarkable accomplishment. Being an entrepreneur comes with a large amount of responsibility; specifically, when it comes to your financials. Paying yourself as an entrepreneur is not a complicated topic, but it does need to be done correctly. The structure of your business determines how you can pay yourself.

Sole Proprietor

If you are the only owner of your business, you are considered a sole proprietor. As a sole proprietor, you would pay yourself by simply transferring funds from the business bank account to your personal bank account. These are called owner’s draws and they can be done at any time. As a sole proprietor, you are taxed on your net income whether you take the money out of the bank or leave it in. In other words, taking the money out is not additional income nor is it a deduction.

Partnership

If you and another person are in business together then you are considered a partnership. To compensate each partner for your contributions per the partnership agreement, you both will receive what is called guaranteed payments. Guaranteed payments are like getting a salary but with no taxes withheld. Cash can be transferred directly from the business bank account or by cutting a paper check to the partner. Guaranteed payments are only taxable to the partner receiving them and the partnership gets to use it as a tax deduction. 

C Corporation

If your business is structures as a C Corp, there are two ways to compensate yourself for your services. One is by receiving a salary through payroll and the other is by receiving dividend payments. As a shareholder of a C Corporation, you are allowed to be on payroll, although not required, it is expected if any payments of cash are transferred. Salaries are tax deductible by the C Corporation, dividends are not tax deductible. Both salaries and dividends are taxable to the shareholder receiving the cash.

S Corporation

When your business is structured as an S Corp, as a shareholder, you must pay yourself a reasonable salary. How much would you pay someone else to do the exact job duties you are doing? Salaries are tax deductible by the S Corporation and taxable to you the shareholder, i.e. the employee.

In conclusion

There are other ways of taking cash out of your business that we will talk about in next week’s blog. Before making any big decisions, we always recommend talking to a qualified tax professional – preferably one who knows your business already. They will help guide you to make the best decision for your business.

We have more detailed advice and information on this topic, along with many more topics, included with each TLE package. Check out TLE and sign up today!