Yes, as a business owner, you can pay yourself through payroll. Paying yourself through payroll involves formally setting up a payroll system for your business, whether you are a sole proprietor, a member of an LLC, or a shareholder in a corporation.
12 steps to pay yourself through payroll:
- Choose a Business Structure: Ensure that your business is registered and structured appropriately, such as an LLC, corporation, or sole proprietorship, depending on your circumstances and preferences.
- Obtain an Employer Identification Number (EIN): If you don’t already have one, obtain an EIN from the IRS. This unique number is used for tax reporting and payroll purposes.
- Set Up a Payroll System: Establish a formal payroll system for your business. This may involve using payroll software, outsourcing payroll processing to a payroll service provider, or handling it in-house.
- Determine Your Salary or Compensation: Decide on your salary or compensation as the business owner. This can be a fixed salary, an hourly wage, or a combination of both, depending on your business’s cash flow and profitability.
- Withhold Payroll Taxes: As the employer, you’ll need to withhold payroll taxes from your compensation, which typically include federal income tax, Social Security, and Medicare taxes. These withheld taxes must be remitted to the IRS and state tax agencies.
- Employee vs. Owner Compensation: Distinguish between compensation as an owner and any wages you pay yourself as an employee of the business. Owners often receive both employee wages and distributions or draws from the business.
- Create a Payroll Schedule: Establish a regular payroll schedule, such as biweekly or monthly, and adhere to it for consistency in payments and tax withholding.
- Prepare Payroll Records: Keep accurate payroll records, including pay stubs, payroll tax records, and other relevant documentation.
- File Payroll Tax Forms: Complete and file required payroll tax forms, such as Form 941 for federal payroll taxes and state-specific forms for state payroll taxes.
- Stay Compliant: Ensure compliance with federal and state labor laws, including minimum wage and overtime regulations.
- Consult with Professionals: Consider consulting with an accountant or payroll expert to set up and manage your payroll system correctly, navigate tax regulations, and ensure compliance with all legal requirements.
- Adjust Compensation as Needed: Review your compensation periodically and adjust it based on the financial performance of your business and any changes in your role or responsibilities.
By paying yourself through a formal payroll system, you can ensure that you meet your tax obligations, including payroll taxes and income tax withholding. This approach also helps maintain a clear separation between personal and business finances, which is important for legal and tax purposes, and provides documentation of your salary and compensation for financial and tax reporting.