how do I pay myself?

[suzy]

Hi. I've been in biz just a few years. I am a sole proprietor. I am just starting to make a profit in the business. How do I know when to start paying myself with a payroll check, or, since I am a sole proprietor, do I just spend the profits the way I see fit, and, pay taxes on that profit? Confused about this. Any direction from you pros.? thx.sue.

[JFeig]

This is really a tax question. You do not say that you have an accountant or not. What type of books are you keeping? Cash or accrual method?

Anything you take out of your business as a "sole propieter" is taxable. As a self employee person your rate would be higher than a corporation for Social Security. I would suggest that you discuss this entire package with a tax advisor or accountant.

[FramingFool]

Hoo, boy ... this could be a real Pandora's Box ...
Personally, our accountant has not foretold of audits-at-my-door if I take a draw ... and a variable one at that .... essentially, for what I need, when I need it. You're gonna wind up paying taxes on it all, anyway (minus whatever personal deductions you can glom), so no harm/no foul. BTW, we operate on a cash basis and are a partnership.

[ 11-03-2003, 03:54 PM: Message edited by: FramingFool ]

[JFeig]

FramingFool,
There is a big difference in a draw and paying ones self.
As a form Auditor for 12 years I am stating what should be done. After a person has been appraised of all the facts they can do what they want. It is then their responsability for their actions.

[Larry Peterson]

If you are a sole proprietor and not incorporated, you don't pay yourself any wages. The entire profit from your business is reported on your 1040 Schedule C as profit and you pay personal income taxes based on the profit amount. When you list your income and expenses on your Schedule C, there is no place for you to report wages paid to yourself. The amounts you pay yourself do not affect your profit. It's not part of how the IRS determines your profit.

Your taxable amount is not based on the actual cash that you take out of the business but on your operating income and expenses, be they on an accrual or cash basis. You can take it or leave it in but you still pay your taxes based on the profit, not the cash taken out.

If you want to take a periodic "draw", there is no problem. If you are incorporated, then you would pay yourself a periodic salary.

Talk to your accountant about this. A lot of us know something about accounting but we are not accountants. I agree with JFeig's advice to see your accountant soon. What I'm saying here is my take based on my years doing my own books and tax returns, first as a sole proprietor, then as a corporation.

You can review the instructions for Schedule C at http://www.irs.gov/pub/irs-pdf/i1040sc.pdf. Line 26 where wages are reported has the following instruction "Do not include salaries or wages paid elsewhere on your return or amounts paid to yourself."

[JRB]

Call 3 to 6 accounting firms or business. Ask them what they would charge you to handle your books, including payroll, taxes, everything. Make sure the company has at least one CPA on staff. If you do this, you don't have to think about it anymore.

Also, by hiring a CPA, in all probability, your chances of being audited are greatly reduced. A good CPA will make sure you get all the deductions your legally entitled to. The taxes you pay will legitimately be the taxes you owe. In other words, you'll be honestly paying your fair share.

Having a friend or relative or even yourself doing your tax returns is like holding a red flag in front of the auditors, it just ain't worth it.

Have ALL your books and tax returns done by a professional. It may seem expensive, but in the long run, it is not.

John

[Terry Scidmore CPF]

I am really late jumping in on this post, but I hope that it might help.

Do use a CPA - get references, make sure the CPA is a person that you understand and are comfortable working and talking with. Pay to have another CPA "review" their work after their first year with you. After my first CPA passed away, the second CPA, recommended by my lawyer, was barely competent. The "review" revealed a lot of sloppy work, and I moved on to a better CPA, whose "review" was excellent.

I went through one of those "randomly selected" IRS audits this year, and it went so smoothly because of a)good book keeping habits, and b)good CPA. The IRS agent was great - knew her stuff, understood business, and was really informative.

By the way, congratulations on making enough to pay yourself! Keep up the good work!

[B. Newman]

This is beginning to go off on a tangent, but trust me, it's a good one.

In my opinion, the best money you can invest is in a "good" CPA. In my case, I have a CPA/CMA (Certified Management Accountant.) He not only does my tax stuff and keeps me on track with all that, but he spends some time each quarter discussing my business with me. "What have you accomplished?" "What are your goals for the next quarter?" "What's your plan for getting there?"

As most everyone knows (and I'm sure is sick of hearing) I deal with a lot of family issues and illnesses that keep me from working full time. Sometimes I go to the meeting so frustrated and aggravated because I have so much work, and see so much more potential, but just can't do it right now. My CPA helps me to look at what I have accomplished and how to direct my limited time to its best use. I always leave feeling much better and renewed.

Yep, it's well worth the investment, to me anyway.

Betty