Should You Put Yourself on Payroll if You Own a Business?

As a small business owner, managing finances can be a complex and nuanced process, especially when it comes to how you get paid. This article explores the decision between treating yourself as an employee (via payroll) and a contractor, with a focus on the implications and best practices for different business structures. For a comprehensive SEO approach, relevant keywords and meta descriptions will be highlighted throughout the content.

The Business of Payroll for Small Business Owners

When starting a business, one crucial decision is whether to treat yourself as an employee or a contractor. The most typical method involves setting yourself up as an employee and receiving a regular salary from the business. However, this model poses several challenges, particularly as the business scales and demands increase. Herersquo;s a closer look at the pros and cons:

Pro: Salary is stable, predictable, and consistent with other employees Con: Can lead to burnout and stress with increasing workload, impacting personal life Con: If another full-time employee is added, less money is available for growth and expansion

For a smooth operation, consider using a Professional Employer Organization (PEO). This service allows employees to be officially employed by the PEO, making you a company employee without the administrative burden. Popular PEOs like Trinet and ADPTotalSource can be highly recommended for their efficiency.

Structural Implications of Payroll

The decision to put yourself on payroll depends significantly on the structure of your business. Here are the key considerations:

Sole Proprietorship or Solo LLC

In such cases, treating yourself as an employee via payroll is incorrect. Payroll expenses should be calculated and deducted from gross revenue, which is not appropriate in a sole proprietorship or LLC. Instead, you should file quarterly estimates directly with the IRS, your state revenue department, and any local jurisdictions. The profit or loss from the business affects your personal income taxes rather than being treated as an expense. Any money taken is a draw from the equity of the company rather than a salary.

Corporation (S-Corp or C-Corp)

For corporations, whether S-corp or C-corp, the tax treatment changes. If you actively work for the company, you should pay yourself a salary considered reasonable by the IRS. This is a payroll salary, not a draw from equity. Any additional money taken beyond the salary is considered a dividend and is treated as a distribution from the equity of the business. Dividends are reported on a 1099 and are not personally taxed on a federal level; the corporation itself is taxed on the profits.

LLC Elections

LLCs have the option to be taxed as a corporation. Once this election is made, it typically holds for at least five years. This can streamline accounting and tax processes but requires careful planning to ensure compliance.

Partnerships and Multimember LLCs

In partnerships or multimember LLCs, the structure and tax implications can be more complex due to varying contributions and workloads. A consultation with a CPA is highly recommended to navigate these intricacies correctly.

Bottom Line and Recommendations

The optimal approach varies based on your specific business structure. Sole proprietors and LLC owners should focus on personal income tax compliance and capital draws. Corporate business owners should consider a reasonable salary for active work and dividend distribution for any remaining profits. Whichever structure you choose, the key is to maintain clarity in your business finances and consult with a professional accountant regularly.

Keywords: small business owner, payroll, business structure, partnership, multimember LLC, sole proprietor, LLC, S-corp, C-corp, equity distribution, worker status, tax implication, professional employment organization (PEO)