I just started my business earlier this year and I am getting to a point where I can take some of the money home instead of reinvesting in supplies and marketing.
I formed an LLC with a separate bank account and have been very careful about not combining business and personal funds. Now that it’s time to get paid I am not sure the best way to do it.
The easiest way for me would be an ACH transfer between my two accounts, but I’m not sure what kind of paperwork, if any, I’d need. I’m planning to set aside about a third for taxes but I don’t know if I need to get myself a W2, 1099, or some other documentation.
Also, does it make a difference if I take draws as I earn as opposed to some regular pay schedule?
I know this is more of a business question than an inspection question, but I’m sure this has to be common in an industry where most of us wear many hats.
Hire an accountant for your initial set up.
I pay myself through my payroll account or through equity distributions. Since you are just starting, you will not have any equity built up.
Payroll and distributions are taxed at a different rate.
Invest in a good, experienced accountant to avoid any surprises. They aren’t expensive and there services are a business expense.
The Schedule C form is what you will be using to determine if and how much of a salary you can take.
There are many ways to “get paid”, and they have advantages and drawbacks.
Say, after everything was paid out you could take the remaining amount as a gain on your personal taxes, then have to pay tax on that amount, depending on your deductions. Or, you could draw a salary, pay 941 taxes and other taxes, and make less. Or, you can pay for many things for the business personally, then reimburse yourself for them.
Those are only a few ways to get paid.
The reason I posted the spreadsheet, is that I have several other spreadsheets linked to that one. I have my wifes salaried income. Her consulting income/expenses (1099). My business income/expenses (S-Corp). And, my rental property income/expenses. Not to mention a monthly budget for the house and business.
I think it is around 240 pages and 30 or more tabs, but, at any time, I can see if I am going to have to pay taxes or not. If I have to pay taxes, I can make extra payments to something, like a vehicle for instance, and get the taxes down to zero. Or, I can pay myself if there is a significant overage.
The spreadsheets are just tools to get you close. My accountant has always been able to find things that I didn’t find, or more precisely, didn’t know about, and we don’t have to pay taxes.
Accountant like everyone says.
The simple choice you have to make is do you pay yourself before taxes or after taxes. If you pay yourself as an employee you get to deduct the entire cost of having an employee (you) from your corporate tax bill. But you the person, have to declare your wages as personal income which is taxed as personal income.
If you take dividends your corporation pays the owner (you) after paying corporate taxes, but you the person pay fewer taxes on dividends declared on your personal income because the gov. is crediting you for the corporate taxes already paid.
So which you choose will depend on who is making the most money or will pay the least amount of taxes, which will depend on your situation.
In my personal situation in a different country, dividends are the way to go, probably in US as well, as tax laws favor businesses or at least have more options to pay less tax.
NOTE: Make sure you check the country of the person giving advice you are taking from here, as Canada Laws (and others) are different from US Laws. There are also differences between States in some cases. Also seek the help of Professionals in cases such as these.
Get a god accountant as most of the info presented here is a little off base and could get you in trouble. They will pay for themselves just like hiring, oh I don’t know, say a home inspector to look at a home.
S-Corps were specifically formed for small businesses like ours, the way my CPA explained it to me is it’s like an LLC, a C-Corp and a sole proprietor, all rolled into one, forming the S-corp. You get the best of all worlds, so to say…