Generating revenue is likely one of your company’s top goals. Part of that includes paying yourself as the business owner. However, the process doesn’t need to be overly complicated. Here’s how to make sure you get compensated for the time and effort you spend running your company.
Owner’s Draw vs. Salary
There are two ways in which a business owner pays him or herself. With a salary, a business owner would set their wage and then get paid that amount each pay period. Taxes are deducted upfront, and this method might be seen as more stable since it’s recurring and predictable.
In an owner’s draw, the business owner transfers funds from the business to their personal account during regular internals or only when needed. It allows greater flexibility than a salary by allowing the business owner to pay themselves more during profitable periods and to take a lesser draw as necessary during slower periods. These funds are taxed at the end of the year.
A business’s classification plays a major factor in which method they use.
How to Pay Yourself as an S-Corp or C-Corp
S-Corp owners must pay themselves a reasonable salary. Typically, this would be the equivalent of what employees in their industry would earn for comparable work.
Factors that should be considered when determining your salary (and that of your stakeholders) include:
- Compensation agreements
- Dividend history
- Duties and responsibilities
- Payments to non-shareholder employees
- Time and effort devoted to the business
- Training and experience
- What comparable businesses pay for similar services
S-Corp owners can take draws on top of their regular salary. However, they cannot solely take draws in place of a salary.
Similarly, C-Corp owners pay themselves a reasonable salary comparable to their industry peers. They have the option to pay themselves more on top of their regular salary. However, it must be done in the form of a dividend payment.
C-Corps have double taxation meaning the corporation pays a federal tax on its earnings. Then, the individual shareholders are taxed at an individual rate on their personal tax returns.
How to Pay Yourself as a Sole Proprietorship, LLC, or Partnership
Sole proprietors, LLCs, and partnerships typically use the owner’s draw method. For sole proprietors and partnerships, equity balance increases with capital contributions and business profits. It reduces when the business experiences a loss or the owner/partner takes their draw.
How an LLC owner pays themself depends on if the LLC is functioning as a sole proprietorship, a partnership, or a corporation. For a single-member (sole proprietor) LLC, the owner and the business are viewed as a single entity and the LLC’s profits are classified as personal income, not business income. For multi-member (partnership) LLCs, profits are reported to the IRS but the business itself isn’t taxed, and each member’s profits are considered personal income. In the event an LLC opts to be treated as a S-Corp or C-Corp for taxes purposes, they would actually follow the salary method (as mentioned above).
Why You Should Have Separate Bank Accounts for Business and Personal Use
It’s a best practice and sometimes even legally required to maintain separate business and personal accounts for your finances. Similar to a personal account, most business bank accounts consist of checking, saving, and credit accounts and merchant services accounts, allowing a business to process credit and debit card transitions. Other perks of business bank accounts include financial protections for both the business and its customers, as well as the ability to establish a credit history for the company.
Shop around for a bank that offers the lowest fees and best benefits for the needs of your company, even if that means going to a bank different from where you do your personal finances. Consider aspects such as introductory offers, interest rates, transaction fees, early termination fees, and minimum account balance requirements. Business credit cards can also offer perks for travel, hotels, and other business expenses. It’s important you consider opening a business bank account as soon as you start handling business transactions, not necessarily once you’ve generated a certain amount of revenue.
In addition, to the perks themselves, a separate business account will offer you important legal protections. It allows you and your company to be recognized as individual entities from a legal perspective. Your separated bank accounts will also save you a headache at tax time since you’ll already have your business income and expenses separate from your personal.
How a Payroll Service Can Save You Time and Money
Utilizing a payroll service to pay yourself as a small business owner will save you a lot of hassle. By hiring a trusted, credible firm to handle your payroll, you ensure that tax codes and other labor laws will be obeyed and that the work will be conducted thoroughly. This is particularly useful for small businesses where staffing and other resources are limited.
Outsourcing clears up your staff’s time handling payroll duties, and it also eliminates the need to purchase software and other supplies specific to payroll. It also saves the hassle of hiring/training on-staff payroll professionals and can be more feasible for a smaller company that might not be able to keep a payroll professional busy for 40 hours each week.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.