Owner Salary For Small Business
Most small business owners dream of paying themselves a salary but aren’t sure about where to start. Paying yourself is not as simple as withdrawing money from your account. If you plan on processing payroll yourself, you need to understand the payroll laws within your state, have an updated operating agreement, separate payroll business account, and more. The payroll process varies per legal entity, the size of the business, the equity of owners, other expenses, and much more.
Here is a quick checklist for setting up your owner’s pay.
1. Confirm Your Legal Entity
Your legal entity determines how you should pay yourself.
Here are examples of how to pay yourself per legal entity.
Sole Proprietorship - You are paid an owner’s draw from the company’s profits.
Pass-through entity (LLC, S-Corp) - Generally you are not paid as a W2 employee. You are paid distributions from the company’s profits. If you wish to be a W-2 employee, you must elect the S-Corp legal entity. Your company can hire you as a 1099 contract. You will receive a 1099-MISC form that reports your earned wages.
Partnership - You are paid partner distributions from the company’s profits.
Corporation - You are paid either dividends or a salary. You will receive a W2.
Understanding which payroll option (salary vs 1099) will vary depending on your tax plan, your future goals, and the consistency of your cash flow.
2. Payroll Bank Account
Most businesses traditionally operate out of one account, the business operating account. If you plan to have a few employees, I recommend opening a payroll bank account. This account serves to issue payroll and pay payroll taxes. You never want all funds mixed into one account.
3. Pick The Most Ideal Software
Maintaining payroll records and your process is going to keep you compliant under state laws and help with tax reporting. There are tons of affordable payroll platforms that help you:
Manages employee records.
handles new hires and onboarding.
Manages and remits payroll taxes.
Captures 1099s and W2s.
Offers CEO and employee benefits plans.
Integrates with your accounting software.
Does it take care of the taxes?
If the software you select directly takes care of all the federal taxes incorporated in the business, it is a bonus! It saves you from a lot of hassle and worries, while also ensuring smooth operations and satisfied employees. This also ensures that the whole process of payroll is completed in the most effective and timely manner serving you with the best of its services.
If you decide against a payroll platform, you’ll have to manually capture employee time, process payroll, calculate taxes, and remit monthly or quarterly payroll taxes.
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