One of the most common questions business owners have is how to pay themselves properly. The right method depends on your business structure, and choosing the correct approach can impact your taxes and compliance. Here’s a quick guide to help you navigate this important issue.
Sole Proprietors and Single-Member LLCs
- You cannot be on payroll. Instead, you take owner’s draws as needed.
- You report net earnings on Schedule C of your personal tax return.
- You pay self-employment taxes (15.3 percent) on self-employment net income.
Partnerships and Multimember LLCs
Partners cannot receive W-2 wages. Instead, they receive:
- Guaranteed payments for services, taxed as income and subject to self-employment taxes.
- Profit distributions, which are generally subject to self-employment taxes (except for passive limited partners).
Cash withdrawals are made through partner draws or profit distributions, based on the partnership agreement.
S Corporations
- You must pay yourself a reasonable salary as an employee via W-2 wages, which are subject to FICA taxes (15.3 percent, split between you and the corporation).
- Any additional profits are taxed to you personally but can be distributed tax-free.
C Corporations
The corporation pays taxes at a flat 21 percent rate. You can receive compensation in two ways:
- W-2 wages, which are subject to payroll taxes.
- Dividends, which are taxed twice—once at the corporate level and again at your personal level.
Make Sure You’re Paying Yourself the Right Way
Choosing the proper way to pay yourself can help you avoid IRS issues and optimize your tax situation. If you’re unsure whether your compensation strategy aligns with your business structure, it’s time for a review.
Need expert guidance? Contact us today to ensure you’re paying yourself correctly while minimizing taxes.
Are you looking to strengthen your business’s financial strategy?
Grab the free 5-day email series – Learn how to stop profit leaks and make smarter financial decisions. Get it here!