Paycheck or a draw?

[COLOR=Blue]As business owners do you take a paycheck from your company with all the taxes taken out or just take an owner’s draw and pay the taxes quarterly? Any ideas about what is better?[/COLOR]

If I would ever get in gear and incorporate (just plain lazy), I would issue myself a paycheck. As a Sole, I draw.

Far as I know, we cannot pay ourselves on a payroll unless we are incorporated.

As a sole I draw too. Mostly because my company is so new (4 months full time) and I’m building it up. I need almost everything I bring in.

I’d be very interested to see how others pay themselves.

I just draw also, as sole proprietor, all my money goes into my business account, then i take from there, and like you Beautiful View, I use almost all I make…especially in the winter, in summer I bank a fair amount, unless I buy a van like this summer, paid cash for it!

[COLOR=blue]I am incorporated and I take a draw but my wife works for my payroll service company and tells me that many business owners take a regular paycheck. I am wondering if I should do that too. If there are any tax advantages for 2008?[/COLOR]

I take a weekly paycheck. Not sure about 2008 tax advantages.

Talk to your accountant. I was told by mine as an LLC I would be taxed twice on the money if I were to issue myself a paycheck.

My first full legitimate year in business I did not know about paying quarterly taxes. And of course I did not put aside the money to pay them in full, I was young. I got slammed and it took me a few years to catch up. Each year what you have to put aside each quarter is determined by your year before revenue. One year some sometime back I made much, much more than the year before and I did not put aside enough in quarterly taxes. Once again I got slammed at the end of the year. It took me a couple of years to catch up again. Paying double tax payments sucks! Anyway I highly recommend that you get an accountant and and make sure you are on top of what you need to be putting aside for taxes. It takes some discipline to put that money aside. At least it did for me.

I also highly recommend that those that are sole proprietors look into becoming an LLC or incorporating to get that liability off themselves personally. The last thing you want is to be accused of scratching mucho bucks worth of glass or whatever, get sued, and they take your personal assets.

Accountants are expensive, but worth it in my opinion.

Another thing. If you use a payroll service (I do) you will be charged for your paycheck too. I know it’s not much but it is money.

[COLOR=Blue] Chris, do you then get a W-2 at the end of the year and file just as you would if you were an employee of A.C.W.C.?[/COLOR]

[COLOR=Blue]OK, that’s my real question. In other words if you take a check, then you are an employee and not subject to self employment taxes, but you are paying FICA ect… and eligible for SSI later.

If you take a draw, you don’t pay FICA or Medicare but you do pay self-employment taxes. Which one is better? I know this is a question for an accountant but I thought someone here might know the difference.[/COLOR]

Yep because I technically am an employee. I just happen to be the only share holder.

I think this might depend on what kind of business entity you are. As an LLC I am basically a sole proprietor with the personal liability taken out. If I were to pay myself by paycheck I would be taxed as an employee. And then would be taxed again as a sole proprietor at the end of the year. At least this is the way I understand it. I trust that my accountant is looking out for me. We certainly pay her enough.:slight_smile:

Also, even though I take a draw I am still paying into SS and FICA, Etc… It’s just done at the end of the year taken out of my quarterly taxes.

An advantage to incorporating is the ability to receive dividend payments which are not subject to social security and medicare taxes. You receive a paycheck and then periodically(quarterly) as a shareholder you receive dividend payments based on profits.

The only real difference between taking a paycheck or a draw is where the tax liability falls. Draw falls on you personally and paycheck fall on the company. The tax rate for social security and medicare taxes is fixed. The corporation will be responsible for making estimated tax payments. If your quarterly estimated payroll tax liability will be more than $2,500.00, you will have to make these payments monthly.

Bottom line a corporation saves you taxes on social security and medicare.

Check with an accountant…it is very easy to set up an S-corporation. Just paperwork and a small fee.

I am not an accountant but these are the basics to it as I understand them.

Regardless of when, you will have to pay your FICA taxes. It’s a matter of cash flow and discipline. If you have a steady enough revenue stream to ensure that when quarterlies come due, or the discipline to put aside a percentage every month to meet quarterly obligations, then take a draw.

If not, cut yourself a check, and pay your taxes evey month like we do. Setting it all up in QuickBooks is easy and reliable. I have been s-corped since 1990 and have always just paid myself like any other employee.

My accountant used to be an auditor for the IRS. He told me two of the biggest red flags were home office (which I have never claimed), and draws vs. with holding taxes. Why give them a reason, is what I figured.

I started as sole proprietor and would take a draw then incorporated after 1st year and since have received a paycheck 1st and 15th each month. Although pay employees on a weekly basis. Taxes are taken as you are considered an employee to an extent also receiving a W2 at years end and filing a personal tax return. Business tax return is filed independently as a corporation. The reason for the switch from sole proprietor was to take liabilities directly off myself personally, especially since I started the hiring of employees. Pay taxes monthly.