Running a business can quickly get in the way of paying yourself appropriately. Here’s how different business structures handle payments to owners, plus tips for including yourself while managing the budget.

Key takeaways:

• A salary is a regular payment an employee receives, and an owner’s draw is a withdrawal of business funds that can be more sporadic
• Each business structure has its own implications for paying taxes and paying yourself, and sometimes it depends on the business’s shareholder agreements
• Tips for paying yourself:

• 1. Include yourself in the budget
  2. Think about what you really need
  3. Assess your worth
  4. Keep tabs on business performance
  5. Factor in benefits

Entrepreneurs know that it’s too easy to forego their pay just to keep a business afloat. But most of us can’t afford to work for free or at a significant discount, at least not for long. It’s essential to know how to pay yourself while still effectively managing a business budget.

You can implement strategies to start paying yourself a living wage as an owner while still focusing on boosting the business’s bottom line. Here’s some essential info about paying yourself smartly and tips for getting started.

Salary versus owner’s draw

First, some clarifications: A true salary is when you get a set paycheck each pay period, as you would if you were a regular employee. The nice thing about a salary is that you don’t have to worry about taking taxes out since they’re withdrawn automatically from each paycheck. And you know you can count on a set amount of money every pay period. However, not all business types allow owners to take a typical salary.

An “owner’s draw” is when an owner withdraws funds from the business to use strictly for personal costs. These can be set up to be taken on an as-needed basis or regularly. The benefit of an owner’s draw is that you have more flexibility in what you get paid and can base these payments on how the business is performing.

“Distributive share” is another term to know. These are any owners’ shares of income, whether a credit or gain. These are treated differently when tax time comes around. Sole proprietors and single-member LLCs can withdraw business money, and it isn’t included on their tax returns. But partners, multiple-owner LLC members, and S corporation shareholders record their distributive shares on their tax return on Schedule K. 

Note that the way income is distributed in partnerships and LLCs will vary based on the business agreements.

Choosing the right business structure

As touched upon, whether your business is a sole proprietorship, C or S corporation, partnership, or LLC will matter when figuring out how to pay yourself. Let’s walk through what each business structure looks like as far as payment:

• Sole proprietors are not employees and do not technically have the paycheck/salary option. Sole proprietors can draw money from the business to get paid, and no taxes are proactively withheld.
• Partnerships: Partners cannot receive a salary because they cannot be both partners and employees. Partners receive distributive shares from the business and record them on their tax returns. The partnership agreement will govern how profits are distributed.
• LLCs: Members of LLCs also do not take a salary as an employee. Single-member LLCs treat draws like a sole proprietor does, and multiple-member LLCs like a partnership.
• C corporation: Shareholders must take a salary. They may also take dividends if allowed, but sometimes profits are put back into the business instead.
• S corporation: Shareholders must take a salary. Sometimes shareholders have to pay self-employment taxes, but they could take distributions as part of their compensation to avoid these taxes since distributions come from income that was already taxed.

A few other tax considerations: C corporations are doubly taxed, meaning the corporation pays taxes on net profit, and shareholders pay taxes on the income they receive from dividends.

Pass-through entities, which can be sole proprietorships, S corporations, LLCs, or partnerships, pass profits directly to stakeholders, who then report income on their personal tax returns. Pass-through entities do not pay corporate income tax exactly like C corporations usually do.

Tips for managing your business budget and paying yourself

It may just be a temporary reality that you won’t be able to take much from your business until it gets off the ground. You have many expenses to cover, and managing cash flow the right way can make or break the business. Here are a few tips when you’re trying to figure out how to pay yourself:

1. Include yourself in the budget

It’s easy for business owners to pay themselves only when the business is performing well, and what you get paid can vary a lot using this method. You’ll have much more control over your personal income and thus your personal budget if you factor yourself into the budget from the beginning. 

2. Think about what you really need

Carefully consider what you really need to get paid right now on a personal level. This is where you should start when including a salary in a business budget. At the very least, pay yourself enough to get by. Outline your basic living expenses each month, including food, housing, bills, and others that are absolutely necessary. Make sure you can pay yourself at least this much.

3. Assess your worth

When determining how much you need to get paid, compare what you got paid at your last job, if applicable, and what you would be getting paid if you worked for someone else doing the same tasks.

4. Keep tabs on business performance

Say you pay yourself a consistent amount each month to cover your basic living expenses. Make sure that if your business starts doing great financially, you also begin to think about paying yourself more. Include this salary in forecasts and consider increasing pay each period, if applicable.

5. Factor in benefits

Just because you’re not a “regular” employee doesn’t mean you don’t need the same benefits. Write down everything required, including health and dental insurance, retirement savings, and anything else that is a must. Make sure these costs are factored into pay when you decide on a number. 

Work with tax professionals to create the right plan

Sometimes these details are overwhelming, and you need assistance from the experts. The team at Provident CPA and Business Advisors can assist you with understanding the type of business structure to create, any tax implications, smart growth strategies, and more.

Contact Provident today to learn more about our services.

Gig workers have unique responsibilities for organizing their tax records and paying quarterly balances on time.

Life as a gig worker can be pretty good. After all, you’re usually your own boss, and you can set a schedule that fits in with your lifestyle.

However, there are some challenges, including filling out invoices, collecting payments from clients, and making sure you have enough money on hand to pay your estimated taxes. You don’t have an employer to deduct taxes for you either, leaving you on your own to report all income when tax season arrives.

Here’s a look at some tips gig workers should follow throughout the year to streamline tax season.

What is gig work, exactly?

Before all else, it’s a good idea to define gig work. Keep in mind that it’s a broad definition that covers many different jobs, but in short, it generally means you’re paid for your goods or services without being considered a full-time employee. 

Jobs that count as gig work include delivery driver, online salesperson, short-term rental landlord, or any contract or freelance worker. Renting out your car or equipment or providing a service like babysitting could also count as gig work. It’s estimated that over half the U.S. workforce could be involved in the gig economy by 2027.

If you aren’t on the payroll but are receiving financial compensation for your goods or services, it’s gig work that you’ll have to pay taxes on once you make at least $400. You’re also responsible for making all contributions to Medicare and Social Security, which a traditional employer splits with employees.

Records you need to keep

Streamlining the tax process involves keeping adequate records throughout the year. Organizing these documents can save you money come tax season because doing so will also include an accurate summary of expenses.

• Expenses: You can use your business expenses to reduce the amount owed. Save all receipts so you have proof of these expenses if the government audits you after filing. You might need to fill out Publication 463, Publication 535, Publication 587, or Section 199A, depending on the type of business you’re operating. These expenses reduce taxable income and can make your overall bill far lower.
• Income: It’s also essential to keep a detailed record of all your income, of course—and the government will eventually find out about it. Even income that doesn’t show up on your Form 1099 or W-2 must be reported because you’ll owe tax on it. It’s a good idea to collect and keep your sales receipts and note all these amounts to the IRS to avoid later complications.

The more detailed information you keep updated, the less time it’ll take you to submit accurate tax records when the time comes.

Paying your taxes

It’s a good idea to pay taxes quarterly rather than waiting until the end of the year, and the IRA requires minimum quarterly payments that are based on income or the prior year’s tax bill. Any gig worker making over $1,000 per year who does not pay quarterly estimated taxes on time is subject to a penalty fee unless they pay 90% of their total taxes within that year or “100% of the tax shown on the return for the prior year, whichever is smaller.”

You can submit these quarterly taxes using Form 1030-ES. This document allows you to estimate how much you owe based on your quarterly income and expenses. It doesn’t have to be exact, but remember you’ll have to pay the difference at the end of the year if you don’t make sufficient quarterly payments. And any total under the IRS minimum is subject to a penalty. 

Filing a return

As a self-employed gig worker, you may have to fill out Form 1040 or Form 1040-SR, depending on your age. 

When filling out your documents, make sure you don’t forget Schedule SE, which is Self-Employment Tax, and Schedule C, Profit or Loss from Business. If you fail to include some self-employment income, Form 1040-X allows you to amend a return.

Start early and engage professional tax planning services if necessary

One of the best things you can do when reducing your tax bill is to begin the planning process immediately. Many gig workers don’t start thinking about taxes until the last minute, which leads to them paying far more than they would have with a good strategy. You’re likely entitled to deductions that you don’t even know about, so seeking professional assistance is often a good idea. 

The team at Provident CPA and Business Advisors helps businesses grow profitably through better business and tax strategies. Contact us to learn more.