Whether it’s better to pay yourself from your business depends on various factors, including your business structure, financial goals, tax implications, and personal circumstances.
Here are some considerations to help you decide…
- Business Structure – The structure of your business (e.g., sole proprietorship, partnership, LLC, S corporation, C corporation) can affect how you pay yourself. Each structure has different tax implications, liability protections, and requirements for owner compensation.
- Tax Considerations – How you pay yourself can impact your tax liabilities. For example:
- Sole Proprietorship or Single-Member LLC – Business profits are typically reported on your personal tax return, and you may pay self-employment taxes on your business income. Taking a salary or drawing distributions from your business can affect your taxable income and self-employment tax obligations.
- Partnership or Multi-Member LLC – Owners typically receive partnership distributions based on their ownership percentage, which are reported on their personal tax returns. Partnerships do not pay income tax at the entity level.
- S Corporation – Owners who work for the business may receive a combination of salary and distributions. Salary payments are subject to payroll taxes, while distributions are generally not subject to self-employment taxes.
- C Corporation – Owners who work for the business are typically paid a salary, which is subject to payroll taxes. C corporations pay corporate income tax on profits, and dividends paid to shareholders may be subject to additional taxes at the individual level.
- Cash Flow and Financial Needs – Consider your personal financial needs and the cash flow requirements of your business. Paying yourself from your business can provide you with a steady income stream to cover living expenses, savings goals, and personal financial obligations.
- Retirement and Benefits – Paying yourself a salary from your business may enable you to contribute to retirement accounts, such as a 401(k) or SEP-IRA, and qualify for other employee benefits, such as health insurance, disability insurance, and retirement plan matching contributions.
- Liability Protection – Structuring your compensation appropriately can help protect your personal assets from business liabilities. For example, paying yourself a reasonable salary from an S corporation can help establish that you are an employee of the corporation, which may provide liability protection for your personal assets.
- Legal and Compliance Considerations – Ensure that you comply with applicable labor laws, tax regulations, and corporate governance requirements when paying yourself from your business. Consult with legal and tax advisors to understand your obligations and responsibilities as a business owner.
The best approach to paying yourself from your business depends on your unique circumstances and financial goals. It’s important to weigh the tax implications, cash flow needs, liability considerations, and legal requirements to make an informed decision. Consulting with financial advisors, tax professionals, and legal experts can help you develop a compensation strategy that aligns with your objectives and maximizes the benefits of your business ownership.
