Should Business Owners Put Themselves on Payroll?
As a business owner, you want to know if you would like to pay yourself wages or not, making it a financial consideration for the business. The decision is often influenced by the structure of your business entity, and understanding the nuances can significantly impact both your pocketbook and tax responsibilities.
The Link Between Business Structure and Payroll Decision
The legal structure and tax treatment of your business entity will dictate the rules surrounding owner compensation:
C-Corporations and S-Corporations
If your business falls under the C-Corporation or S-Corporation category (an LLC entity can file tax as S-Corp as well), owners must pay themselves on payroll, what is considered as “reasonable compensation. Every time you run payroll; it ensures that your earnings are subjected to proper tax withholdings. Online platforms can help streamline this, generating a pay stub for each paycheck you receive as a business owner.
Sole Proprietorships and Partnerships
Sole proprietorships and partnerships operate under the principle where the profits and losses flow directly to the owners. They cannot pay themselves via payroll, the earnings of each partner are subject to self-employment tax; paying taxes as an employer and employee.
Distributions, Dividends, and Their Tax Implications
When business owners take out distributions or dividends from the company, it’s essential to remember that these are considered taxable income. Regardless of your decision to be on payroll, these distributions will need proper calculating payroll considerations to ensure tax compliance. If you’re using platforms to run payroll, they often provide functionalities to manage these distributions efficiently, even if they don’t generate a standard pay check stub. It is important to know what are the tax implications that you could encounter. When no taxes are being withheld on payments, they can create bad surprises.
Business Structure and Its Impact on Owner Payroll
The decision to put oneself on the payroll is multifaceted and highly dependent on your business’s structural entity. Whether you’re juggling the complexities of calculating payroll or determining distributions for a sole proprietorship, understanding these distinctions is crucial. In all cases, considering professional payroll services can simplify the process, ensuring compliance and easing the administrative burden.