For those who have always worked for other people, it’s a strange moment when you realize you have to pay yourself. Some find it amazing and inspiring. Others find it a little scary.
Your business becomes bigger than you simply working and earning money. There are expenses and overhead. You bring on employees that need to be paid. You invest in the future of your company. All the while, you need money for yourself.
How do you go about doing that? Well….
It Depends on the Type of Business
As we’re sure you’re aware, there are different business types that exist. This affects how exactly you get paid.
If your business is a corporation, you’ll need to pay yourself the same as any other employee. That means a paycheck with FICA taxes taken out.
If you’re working as a sole proprietor, or you have an LLC, you won’t take an actual paycheck or salary. Instead, you simply draw money. This money isn’t taxed immediately, which means you will have to pay self-employment tax on it. This should be done through estimated quarterly tax payments.
How Much Do You Pay Yourself?
In some settings, a business owner will have their salary determined by a board or group of advisors. For many entrepreneurs, however, the power is in your own hands.
Whatever you do, you should always make sure you pay with profits, not revenue. From there, it’s up to you. For corporations, the IRS expects you to earn reasonable compensation for what you’re doing. Assuming your business is healthy and successful, you should be paying yourself a similar amount to others in your industry.
Otherwise, things may look suspicious.
For sole proprietors and LLCs, there’s no set expectation. However, it’s best to pay yourself a straight amount each month, rather than letting your income fluctuate depending on what you’ve earned.
To do so, set an amount that’s modest enough that it should be no problem paying yourself, but generous enough that you can live off of it. Worst case scenario, you end up with extra money left at the end of the year, which can be a nice problem to have.
Let Us Handle the Payment
Overwhelmed with the idea of payroll? Afraid your accounting is filled with holes? Have a general fear of numbers? We can help with all of that and more. For tax, accounting, and payroll services in Springfield, Ohio, LWS is here.
Contact us today, and get help now.