Do I Need Payroll?
You have put hard work and dedication into your business, and now it’s time to get paid. Depending on your company’s structure (entity type), there are different ways to pay yourself as a business owner. Some owners pay themselves through an owner’s draw and others pay themselves a salary. Aside from the business structure, you will also want to consider your business’s financial plan, and how many years the company has been in operation.
If you have a sole proprietorship, partnership, or an LLC, you will probably pay yourself through an owner’s draw, not through a traditional payroll. Owners of these types of entities are usually not paid regular wages, so the owner takes money out of the company for personal use. This money is taxed at the end of the year when the owner files his or her personal tax return. It is important to set aside funds throughout the year to pay your quarterly estimated taxes and annual income tax return. Owners of an S corporation have the option of also taking a draw in addition to their salary.
For C corporations and S corporations, you will pay yourself a salary that is commensurate to the same position in a similar company. Owners of an LLC can elect to be taxed as an S corporation and receive a salary. The salary is a set, recurring payment that is subject to employee tax withholdings, and should be “run through payroll” with the proper deductions taken out and matched by the company for payment to the IRS. An owner’s draw on top of salary is only reported on the personal tax return.
For more information about how to pay yourself as a business owner, contact us at H&H CPAs. Our professional, experienced CPAs would be happy to guide you through this potentially complicated topic.