The CFO for Small BusinessPaying yourself from a small business, planned with your taxes
You're looking for how to pay yourself from a small business, and how that connects to your own taxes. Tax CFO Steven Palmieri puts the idea first, and Steven and his team build on it. How you're paid depends on how the business is taxed, so the two are decided together, once, and then checked each month.
Set my pay with you
How the structure decides the method
If you're a sole owner, or you own an LLC that hasn't elected anything special, you generally take draws. A draw is money you move from the business to yourself. It isn't a paycheck, and no taxes are withheld from it, which is why planning matters.
Owner pay works differently when the owner works inside an S corporation. The IRS expects you to be paid reasonable compensation as wages for the work you do, before taking other distributions. The IRS can reclassify distributions as wages if the pay looks too low. The right amount depends on the facts, such as your duties and what comparable businesses pay.
Set once a year, checked every month
Many owners pay themselves when the account looks full. That feels natural, but it makes your pay depend on whatever happened to come in last week. It leaves your taxes to chance.
A better habit is to set owner pay once a year, together with the year's tax estimates, and to check it when each month closes. The question each month becomes simple. Did the pay we planned come out, and is the business still on track to cover it?
What the choice does to cash and to your return
Your pay affects three things at once. It affects the cash left in the business, which is its cushion. It affects your personal tax bill. And it affects how much of the year's profit is taxed in which way.
Say a business earns $100,000 of profit before any owner pay. This is an invented example, with a round number. A sole owner is taxed on all $100,000, whether or not it was taken out. An S corporation owner takes a wage first. Suppose, only to make the arithmetic easy, that the wage is $50,000. The wage goes through payroll with taxes withheld, and what remains can be a distribution. The right wage isn't $50,000 for everyone. It depends on the work and the facts.
Payroll for an owner's wage
When an owner takes a wage, it runs through payroll like anyone else's. We don't process payroll. A full-service provider runs the payday itself, under your control. We help set it up so that the owner's pay is entered correctly, the registrations are in place and the provider feeds the books. After each quarter, we check what the provider filed.
Planning, not guessing
Owner pay isn't separate from the rest of the year. It connects to your estimated payments, your equipment plans, your retirement contributions and the cash you want to keep. Looking at them together takes a short conversation in the fall, and it can change what you decide.
What this page is, and isn't
This page explains the structure of how owners are paid. It isn't about how much cash can safely leave the business at a given moment, which is a different question. It's about how pay is built, how it fits with your own return, and how to make it a decision instead of a habit. Business profit on your personal taxes shows what the return looks like on the other side.
Both sides. This page's subject touches the company's cash and your own tax bill together. A pay decision made for one and not the other tends to come back as a surprise on the side that was ignored. Keeping the two accounts clean, as described in keeping business and personal money apart, makes the whole thing easier.
How are you paid today, and does it feel planned?
You will be talking to the Steven Palmieri practice.