I am a sole prop. and do not write myself a check. I decided not to do an llc after talking w/ my acct and atty. I take draws as needed. I have heard from a couple other wcers that I should pay myself/put myself on salary because that looks better when I go to sell the company…any thoughts?
Do most of you have yourselves on payroll?
It’s not only better for selling the company but also better in the event you are audited. Red flags will fly if you get a decent volume of cash flow and have no “official” record of paying yourself out. I pay myself a salary and do so even through the winter.
As a sole prop with no employees I draw as needed. In the words of my accountant, “You worked for it, it’s yours. Just as long as you pay what ever tax is owing.”
I don’t see how paying yourself a salary will be beneficial is selling down the road. Anyone looking to buy off a sole prop will look at gross sales versus expenses = Profits. As a sole prop, what you do with the profits is entirely up to you. ie: put it back into the company, take a vacation, buy a home theatre, etc.
However, once you start having employees I’d also get yourself on the payroll.
Just my opinion. 
I pay myself a salary. If you decide to form an LLC you pretty much have to. You want to keep your business and personal finances as separate as possible. If you decide to stay as a sole proprietor, you can keep doing as is, just make sure your records are in order and you should bo fine.
Why when I have employees? I do have 2 emp. on payroll, 1 being my husband…
There are different types of LLC’s. My company is an LLC w/employees and I pay myself a draw as needed, and pay my taxes quarterly. My understanding is that having employees makes no difference in how you pay yourself. I don’t really get how it would effect the sale of the business either, since paying yourself comes from an equity account and employee payroll comes from an expense account. If anything, an owner not being paid as an employee would make the company look more profitable.
The only reason I say this is because for selling and for getting business loans (if needed) it might be a good way to show how your business is providing incomes for staff (including yourself), paying bills and still something on top to put back into the company. Not saying it’s needed really; perception to outsiders is relative. It also may show that your company is ready to bump up to the next level.
If you are an officer of an LLC you are considered an employee. Paying the taxes as an employee both from the employer end and the employee end is just a wise decision. If ever audited, it could make a difference in how deep the probe would get.
Hey Dwight, maybe this can shed a little light on the situation:
“Normally, a single-member LLC is a “disregarded entity” for tax purposes – i.e., the existence of the LLC is ignored, and for tax purposes the business is treated as conducted by the member. For an individual, the LLC’s operations would simply be included on the individual’s tax return, usually on Schedule C. If the member is a corporation or other entity, the LLC’s operations would be included in the tax return of the corporation or other entity. The disregarded entity treatment will apply unless the LLC affirmatively elects to be taxed as a corporation instead. That election can be made by filing IRS Form 8832.”
Like I said, there are different types of LLC’s and there are different types of corporations and they are all taxed differently. Each person needs to consult with a CPA and an attorney as I have done and decide with their help what is the best route to take based on their individual situation.
I understand the particulars. I thought you had employees. If you do then the dynamics change.
I do have employees Dwight, but that doesn’t affect the structure of the LLC, since my employees are not shareholders or officers of the corporation. They are just employees of the corporation that I am the single officer of, therefore I am a disregarded entity even if I had 100 employees.
I have the luxury of having a sister inlaw that is a CPA. I also am a single officer LLC. She informed me that it would be best to pay myself a salary based on the income of the business and change it according to how much revenue is coming in. She never stated I had to by law. She told me that the IRS has “red flag” situations that they monitor and that someone in my situation that did not pay myself a salary would be subject to auditing.
Not that I have anything to hide but you never know. Bookkeeping isn’t my cup of tea and that is why I’m grateful she is my advisor. I do know a friend of mine has a small business that got audited and he got fined for some very small crap. I don’t need that so anyway I can keep the dogs away is the direction I walk in.
when a few of you are saying…“I take a draw as needed” is that writing yourself a check?
For thoses that say they dont write themselves a check, how/where does your “pay” come from
I am a sole Prop. right now…but may change
I registered as a corporation in Ontario Canada.
What I do, is that I write up an expense report for out of pocket expenses of the president. Such as gas, insurance, etc that I pay on my personal credit card. I write one up for each month, sign it, and then I print myself a check and sign it and enter the information in Quickbooks
So far I have saved half the amount of money I have earned. And I haven’t written a cheque for myself for anything besides out of pocket expenses.
This spring, after my accountant figured out how much managment salaries and bonuses were for 2008. So after that I printed a signed myself a cheque for that much money.
So In summary, I write a report, enter the information in quickbooks, print and sign a cheque from quickbooks, and deposit the cheque in my personal bank accountant.
By the way if you live in Canada, Presidents Choice Financial is the best for personal banking. No serivce charges! I use TD…sigh…for my business banking.
I deposit all earnings into my business account once a week, but usually hang on to a couple of hundred in cash to pay for weekly common expenses like gas, supplies, etc. Anything I need for myself personally I usually transfer from my business account to my personal account around twice a month.
For those who take a draw from the business do you report that as personal income? I know that all money that comes into our business is reported. I have to pay taxes on that income and then since I collect a paycheck every week, that gets reported as personal income and I pay taxes on that money at the end of the year. Does taking a draw mean you just avoid paying personal income tax?
That’s what I was driving at. Taxes need to be paid for both the business and the individual. To each their own though.
I guess maybe some people have their ‘sole prop’ set up a little differently.
For me ( a sole prop with 0 employees) the math is pretty easy.
[COLOR=“black”]Total income minus total expenses = profit (taxable income)[/COLOR]
I file a personal tax return. I have a business with income and expense. I have another smaller business with income and expenses. Profits from both are considered taxable income.
This is getting silly. Of course you pay taxes on owners draws from the business. They are paid as quarterly estimates to the IRS. Dwight, go to your sister in law and verify that Since the LLC is considered a “disregarded entity” by the IRS, the LLC is handled as a ‘Schedule C’ sole proprietor.
Secondly, Since you will be personally taxed on the profits of any non-C corporation business whether you draw a formal salary or not, it’s a non-issue how you pay yourself as long as you report your income on your income tax return. From the owner’s standpoint, the term “salary” really applies only to C corporations, which have other advantages such as bonuses and dividends to corporate officers.
Finally, I don’t set myself up as an employee, because I don’t want to pay unemployment tax on myself since I cannot draw it anyway, and adding myself as an employee, would raise my total payroll costs which is used to calculate my workers comp insurance, so higher workers comp costs too.
I don’t think this is getting silly. In fact, I think this interaction might be quite informative to some. My questions were valid, Linda’s questions were valid and so were yours Steve. It’s not personal.
I’ll follow my CPA until something less than appealling occurs. 
