One of the questions asked most often by new business owners is “How do I pay myself from my business?”

After all, among the reasons for starting your own business is to earn income for yourself, so knowing how to get that income out of the business is critical. As a business owner, you are faced with a number of new challenges as you launch and grow your business. This article will help provide guidance for one of the most universal challenges.

The first item to cover is the type of entity. How has the business been formed? As a Partnership? As a Sub-S Corporation? Or perhaps you have not formed an entity and are doing business as a sole proprietor (whether or not you have registered a DBA name).

We need to start with the form of entity because the answer to the original question varies based on what type of entity you have created. We will follow up with a more detailed discussion of entities, but for now, here is how we answer the question of “How do I pay myself from my business?”

Owners of most types of businesses (other than ‘C’ corporations) have the ability to write themselves a check from the business, though some entities are more restrictive than others. However, the coding and characterization of the payment must be properly identified.

A sole proprietor can write a check to take funds out of the business at any time. Checks written to the owner should be posted to Owner’s Draw or Distributions. Those are simply two different labels that describe money taken from a business by the owner. To pay yourself, print or write a check and post the check to the Distribution account.

Similar to a sole proprietor, partners can write checks to take funds out of the business at any time. However, if they distribute funds in excess of their basis (accumulated profits + personally guaranteed debt), they will be taxed on the difference as excess distributions.) If you are taking money out of a partnership that is not making profit, be sure to check with your tax professional about whether you have received excess distributions.

Sub-S corporations are companies that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of Sub-S corporations report the flow-through of income and losses on their personal tax returns.

When corporate officers perform services for the Sub-S corporation, and receive payments for those services, their compensation is generally considered wages. The fact that an officer is also a shareholder does not change this requirement. Once they have been paid an amount equivalent to a reasonable salary, they can then take distributions from profits.

A regular or 'C' corporation reports and pays federal and state income tax on its net income. There is no flow-through to the shareholder’s personal tax returns. Therefore, shareholders are not entitled to take funds out of the corporation. Checks written to shareholder-employees must be in the form of salary and are subject to all appropriate payroll taxes.

The purpose of this article was to provide some general information and guidance about this topic. However, there are many tax considerations to any response for the question of how you can pay yourself from your business. Further, do you know how to actually complete the transactions necessary to take money out of your business?

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