So, How Much Are You Taking Home as a Small Business Owner?
As a small business owner, you might be wondering how much of a paycheck you will get each week. Most of the time, an owner won’t take an actual salary. Instead, there are different payment methods depending on the legal structure of the business.
Business Owner Draw vs. Distribution
If your company is operating as a single-member LLC or sole proprietorship, you can draw funds from your business accounts. It’s considered an accounting function and it won’t need to be included on your tax return. However, if you are operating as a corporation or other legal entity, withdrawing funds is considered a distribution and is recorded on the owner’s tax paperwork. As a sole proprietor, you are the business owner and get paid by taking from the profits your business has accrued. These are considered draws, because they are drawn from the ownership account.
In a partnership, neither member receives a salary. They may take distributions from the joint profits, and they are ultimately taxed on the share they received. Ultimately, the language used in the original partnership or LLC agreement will determine how profits are to be distributed. The small business owner who operates an LLC is not regarded as an employee and will not take a normal salary. They will take a draw, much like a sole proprietor. If there are multiple members forming the ownership of the LLC, they will take distributions like that of a partnership.
The corporate officers who manage the daily operation of the company will take a salary, but they will be required to pay employment taxes on the funds. However, shareholders in an S corporation are allowed to take distributions from the business’ profits as well. If you are the owner, you are free take any amount you want from your business. It’s in your best bet to leave enough money to pay for business operations, pay off existing business debt and pay for your employee salaries.
No matter how you choose to receive your funds, a small business owner is still liable for an employment or income taxes required by the IRS. As to the amount of money that you take, the IRS has also crafted a guideline for figuring out a reasonable salary. Take into your experience, duties, time spent and amount of investment as you decide how much to get paid.