How To Pay Yourself As A Sole Proprietor

Starting a sole proprietorship is pretty easy. There’s very little paperwork required; just get the licenses and permits you need. You also need a business bank account. Other than that, owning a business as a sole proprietor is pretty easy—until you realize you need to pay yourself. How much do you pay yourself and how exactly do you do it?

There are some guidelines you need to consider when you decide how much to pay yourself. Of course, there are taxes that apply, so when you sell something, be prepared to pay the IRS first, as well as state and local agencies.

However, don’t think that you should just live off your savings and pay yourself nothing. You should pay yourself a fair wage to prove to the IRS that your business is not just a hobby. Also, you want to have accurate finances for your businesses so you can make projections and plan for the future.

So what exactly is considered a fair wage? You should at least give yourself enough money to pay for personal expenses. You want to make sure your bills are paid. You can also calculate how much to pay yourself based on any equity you have in the business. This is determined by taking the value of your assets and deducting your liabilities. Hopefully, the difference is a positive number, but if you’re just starting out, it’s possible that you have more money in your business than you’ve made so far. A measure of success is being able to pay your overhead costs and salary while still making a profit.

How to Pay Yourself

Now that you have a better idea of what to pay yourself, the question now is: how do you do it? The easiest way to do this is to simply take the money out of your business bank account and use it for personal expenses. This is considered a “draw” rather than a salary. To take a draw, just write a business check to yourself.

You will not be required to pay taxes on this amount because under IRS laws, a business’ profits and a sole proprietor’s personal income are considered the same thing. What this means is that after you’ve deducted business expenses, what you have left is considered personal income.

Because a personal income tax return is filed just once a year, it’s a good idea to pay yourself on a more consistent basis. To do so, you’ll need to estimate your business’s profits and use this number to arrive at a consistent salary. You can also give yourself bonuses if your business does better than expected.

Learn More About Sole Proprietorships

While sole proprietorships are generally the easiest type of business to operate, finances can get tricky and you may wonder about income, taxes, and similar issues. That’s why discussing your concerns with a lawyer can help.

Orlando sole proprietorship lawyer B.F. Godfrey from Godfrey Legal can help you understand your legal requirements. He can address your concerns and help you make good decisions. To schedule a consultation, fill out the online form or call (407) 890-0023.

Resource:

nerdwallet.com/article/small-business/how-to-pay-yourself-sole-proprietorship