I know how to handle paying an employee, but I haven't any idea as to how to handle paying myself.

I use to work for an actuary sole practitioner. Every two weeks he took $ out of the business through a drawing account, but never took an actual salary.

I'm wondering if this is the best way to handle paying myself?

I'd like the easiest but legal way to do this.

Suggestions please.

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A L Camien
Manager Member

A L,

I take a draw in order to pay myself. Most people write a check to themselves to have record of the transaction however I do a wire transfer from my business account to my personal.

You will be paying all necessary taxes when you file you end of year tax returns and should account for these amounts.

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Lee Drozak
My Office Assistant

How do you handle taxes? Isn't there a penalty if these taxes aren't paid in a timely way.

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A L Camien
Manager Member

My husband does my taxes so I don't know the dollar amounts, but I think you have to pay taxes on the profit your business is making. Since you don't take withholding out of your account on a regular basis, like an employer would in your weekly paycheck, you will owe that money to the IRS. If you owe too much, you should make quarterly installments. If you owe too much at the end of the year because you didn't make quarterly installments, the IRS might slap you with a fine. I don't know the amounts, and it might change from year to year, so it is worth checking into so you don't get fined. All I know is that if your business is making a profit, you should make quarterly payments.

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Pam
www.adminetcetera.com

A L,

If you Google self-employment tax calculators you will find a few who have applications to do that with simple input of information. I believe Intuit has one too but I cannot remember.

This is from the IRS website:

Quote:

The self-employment tax rate for self-employment income earned in calendar year 2011 is 13.3% (10.4% for Social Security and 2.9% for Medicare).

Here is a good article that explains the Self Employment Tax.

And yes if you underpay there is a penalty which I believe is based on the amount you under-payed for the year.

One other thing to remember is you will also have state (an possibly) local taxes that need to be figured into your calculations. Each state and municipality differs to I would look at their websites or call the tax department. My state tax is a flat 3.07% and my local is 1%, both of which I put those amounts aside too. These are usually also calculated on the net profit of the business.

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Lee Drozak
My Office Assistant

Thanks for the information and the links - I hadn't thought about the aspect of paying myself.

Originally Posted by leedrozak

... the net profit of the business.

What Lee said is key here. For example, say you pay yourself a set amount each week. After expenses you still have $X.XX in your business checking account. Just because you didn't "pay" yourself all that is in your business account after paying expenses does NOT mean that the funds still in your checking account are NOT taxable.

ANY monies taken in by your business, and not offset by expenses, are considered taxable income and subject to self-employment taxes - whether you use these monies by paying yourself or not.

Also, what you pay yourself (a draw) is NOT a business deduction/expense. (Had a client that thought it was, so just adding this 'just in case' anyone thinks this to be the case.)

I don't like the whole idea of "paying" myself. I earned it, I brought it in, and if it's there, it is mine to use as I see fit. Yup, I'm weird that way.

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Jules, SunRise Virtual Solutions - WordPress Customization & XHTML/CSS Web Sites

So if one takes a draw that's not a paying the owner and, therefore, not a business expense. so how does one pay oneself and make it a business expense?

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A L Camien
Manager Member

Originally Posted by alcbiz

So if one takes a draw that's not a paying the owner and, therefore, not a business expense. so how does one pay oneself and make it a business expense?

You don't. It is all considered income for the business owner and taxable. A 'draw' is paying the owner. You debit the owner's draw account and credit the business bank account to record the transaction.

HTH a bit,

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Jules, SunRise Virtual Solutions - WordPress Customization & XHTML/CSS Web Sites

A L,

Ditto to Jules. If only we could pay ourselves and it be a business expense, life would be grand. You pay yourself from the profits of your business just as you pay taxes on the profit.

I would consult with an accountant to get the best advice and help make clear sense of it. It is best to understand all the ins and outs now before tax season hits again.

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Lee Drozak
My Office Assistant