How should I pay myself?
Being the owner of a services company I was wondering if it is better to pay myself with a paycheck, or have tax deductions taken out of each pay check, or just take a draw and try to figure out the taxes on my own and pay them quarterly?
It varies depending on your business structure, operating costs, services, and more. The Business.com team wanted to help you come up with the right answer, so they spoke to experts and came up with steps to How Should Entrepreneurs Pay Themselves?.
It outlines the two most popular ways to compensate yourself.
1. Owner's Draw - Owners of LLCs and partnerships do not get paid with regular wages, they are paid with owner's draws and don't get taxed until later.
2. Salary - A salary is appropriate if the owners are involved in the day-to-day operations and are seeking compensation for their work. Owners should file quarterly taxes if compensated by salary.
The guide also outlines how to decide on an amount to pay yourself and changing your business structure (if necessary) to meet your payroll needs. Hope this helps!
Bravo that you're thinking this through! Gusto/Zenpayroll is a great option but does need to be monitored by a trained payroll eye, I've found two mistakes already with year-end filings with clients that I manage with them. I am happy with them otherwise, though, it's a great solution. Your tax accountant can advise you on reasonable salaries as well as draw structures that won't overdraw the basis and trigger capital gain. I've written a blog post in this same vein
The toothpaste is out of the tube but this needed to be clarified in your partnership agreement. Since I am not an attorney, I will start with I believe (or in my opinion) the LLC structure makes all funds received from the LLC a distribution as regular income. If you are not taking a paycheck then you need to take a K-1, so take a paycheck. If something happens and at the end of the quarter you don't have the money, you have a serious problem.
Hi Anthony. This is a great question. I did a video talking about this with a tips here: https://www.youtube.com/watch?v=jLkL_wg9cnE
In a nutshell, the best thing to do is plan a regular pay check with minimal tax deductions on a low pay and a fixed monthly draw. This way you can plan ahead on how much tax your services company pays.
The easiest way to to sign up with a payroll company. I use www.gusto.com (formerly Zenpayroll). They are flawless and cheap at about $30/month. They will pay all your taxes for you.
If you don't actually pay yourself you can run into problems with the IRS for not paying Medicare, FICA, etc. Over the past ten years the IRS has really cracked down on the self employed for not paying payroll taxes.
You don't have to pay yourself a lot. You could each take, say $500 a month.
Very interesting thought, Anthony. If you want to grow your business, you should think of a steady pay check for yourself. That way, when you add folks and partners later, you know how to churn your finances. Once you've paid off the taxes and other expenses, leave a percentage behind to reinvest in the business - for the business. A percentage can be earmarked for external services. The balance is your pay check - at least for now. Just make sure that this figure is fixed and any additional gains go into the business account only. Of course, if you incur losses, you'll have to pull them out from your 'pay check'. Hope this helps.
To answer that I think we would need to know your business format. If you are a sole proprietorship could just take a draw and figure out the taxes quarterly. If you are an S corp, C corp or LLC you would be better off taking a pay check and taking your taxes out at that time.