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Louisiana Women In Business Winter 2021
HOW TO PAY YOURSELF WHEN YOU'RE THE BOSS
Written by: Darolyn Mahon Freelance Writer & Digital Marketing Consultant
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Whether you’re just starting your business or are already established, it’s essential to know how to pay yourself. To operate as a sole proprietor, you need to understand several different aspects: what it means to the IRS for tax purposes, what your business profits will be, what you need to operate the business, and if you’ll be paying employees.
Let’s get started.
According to the IRS, a sole proprietorship is an unincorporated business with one owner. If you are self-employed and operating under your given name, you can be eligible for a sole proprietorship. If you operate using a DBA, there’s no legal distinction between you, the owner, and your business name. All business profits pass through you and are reported on your individual income tax forms. The year’s profits (or losses) are reported on IRS Schedule C and included with your tax return. You’ll need to pay state and federal income taxes on all profits in addition to a self-employment tax.
As a sole proprietor, you pay yourself an “owner’s draw” rather than a salary because you cannot deduct your salary as an expense. Your pay is the profit your business makes at the end of the year minus expenses. Taking an owner’s draw from the profits means taking money from the business account and giving it to yourself either in cash or check.
You can do it once a week, once a month, or as needed. If you hire employees other than independent contractors, an Employer Identification Number (EIN) is required for reporting employment taxes. You can obtain an EIN through www.irs.gov.
Operating your own business can be challenging but also rewarding. Stay organized and keep detailed, accurate records of your income and expenses. You should open a business checking account rather than using your personal checking account. As your business yields income, open a savings account to set aside at least 30% of your earnings for taxes later.
If you use your home for business, you can deduct expenses such as rent, utilities, phone and internet. If you own the property, you can expense your real estate taxes and mortgage interest, as well. Other deductions can include start-up expenses, marketing your new business, travel, transportation, training costs, office equipment like computers and software as well as office supplies. Consult a tax professional, such as a CPA, to determine which tax deductions and credits are available and how they can apply to your small business.
For more info, visit www.irs.gov/businesses/ small-businesses-self-employed. Says Holly Hingle, VP of Operations & Business Development at Click Here Digital, “2020 has given so many people the opportunity to start their own business.
It’s been a year of change for many, where looking back, many people may not have otherwise taken the risk.”
To register your business in Louisiana, visit the Secretary of State’s geauxBIZ site at www.geauxbiz.sos.la.gov online.
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