AS A BUSINESS OWNER, HOW DO YOU ACTUALLY PAY YOURSELF?
In many cases when you start a new business you go without paying yourself until your business makes enough money. So, once you get to be profitable how do you go about paying yourself for your efforts legally?
According to the law, if you are an officer in a corporation you must be on the payroll and receive regular paychecks. Your paychecks should include withholdings for Social Security, Medicare, Federal Income Taxes, and any state income taxes that may be required.
If you have structured your company as an S Corporation you also receive paychecks with all the same withholdings, however, with and S Corporation you have the option of taking additional in the form of a draw or distribution. The difference is the checks for a draw or distribution are made with no withholdings for taxes.
Considering the tax implications, the question then becomes how much to take as a salary, and how much to take as a draw?
The IRS requires you to earn reasonable compensation for the type of work you do. A suggested guideline is to base your pay on an amount similar to what another business would pay someone to do what you do.
To avoid penalties and interest for incorrect payroll-tax reporting, business owners are advised to carefully consider the total amount of salary and draws they take for themselves. It would be a good idea to learn what the IRS considers to be reasonable compensation.
Regardless of how you decide to pay yourself you just need to remember that you will be paying taxes on it. When paying yourself a draw, you can implement a system as simple as keeping the cash to pay taxes in an envelope for later, writing monthly checks to the IRS, or making quarterly estimated tax payments. It may take a certain amount of discipline to set aside money for taxes so if you need help, it may be advisable to enlist the help of professional business consultants.