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Should I Put Myself On Payroll?

Should I Put Myself On Payroll?

Whether you should put yourself on the payroll as the owner of a business, particularly an LLC, depends on several factors, including your business structure, tax considerations, and personal financial needs.

Here are some considerations to help you decide:

  1. Business Structure: The decision to put yourself on payroll can be influenced by your business structure. If your LLC has elected to be treated as an S Corporation for tax purposes, putting yourself on payroll is often a common practice to optimize self-employment tax and income tax planning. S Corp owners typically receive a reasonable salary and may take additional profits as distributions, which are not subject to self-employment taxes.
  2. Tax Considerations: The tax implications of paying yourself through payroll versus taking profits as distributions can vary. Consider consulting with a tax professional or accountant to determine the most tax-efficient way to compensate yourself based on your business’s specific financial situation and your individual tax circumstances.
  3. Self-Employment Taxes: If you don’t put yourself on payroll and instead take profits as distributions, you may avoid paying self-employment taxes on the distribution portion. Self-employment taxes include Social Security and Medicare taxes, which can be a significant expense for self-employed individuals. However, by not paying self-employment taxes, you may have reduced access to certain benefits, such as Social Security retirement benefits.
  4. Regular Income: Putting yourself on payroll can provide you with a consistent and regular income, which can be beneficial for budgeting and personal financial planning. If you rely on a steady paycheck to cover your living expenses, being on payroll can help with financial stability.
  5. Compliance: If you choose to put yourself on payroll, you must adhere to payroll tax requirements, including withholding and remitting federal and state income taxes, Social Security, and Medicare taxes. You will also need to file payroll tax forms and meet other payroll-related obligations.
  6. Legal and Accounting Considerations: The decision to put yourself on payroll may involve additional legal and accounting responsibilities, including setting up a payroll system, keeping payroll records, and ensuring compliance with labor laws and tax regulations.
  7. Personal Financial Needs: Consider your personal financial needs and whether being on payroll or taking distributions aligns better with your financial goals and obligations, including living expenses, savings, and debt management.
  8. State Laws: Be aware that state laws and regulations related to payroll, taxes, and LLCs can vary. It’s essential to understand the specific requirements in your state.

The decision to put yourself on payroll or take distributions as an LLC owner is a complex one and should be made in consultation with a qualified tax professional or accountant who understands the intricacies of business taxation. They can help you structure your compensation in a way that is tax-efficient and aligned with your financial objectives while ensuring compliance with all legal and tax requirements.