A common question among business owners is how to pay themselves from their businesses properly. The correct method depends on your business structure, so I wanted to give you this quick guide to help you navigate this issue and manage paying yourself cash from your business.
Sole Proprietors and Single-Member LLCs
- You cannot be on the 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 tax (except for passive limited partners)
Cash withdrawals are made through partner draws or profit distributions per the partnership agreement. This can be another way to handle cash from your business.
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 as cash from your business.
C Corporations
The corporation pays taxes at a flat 21 percent rate.
You can receive compensation in two ways:
- W-2 wages, subject to payroll taxes
- dividends, which are taxed twice—once at the corporate level and again at your personal level. This affects withdrawing cash from your business.
Interested in discussing how your business pays you? Contact us today!