Paying yourself paychecks

[Sjoechapman]

If you have a sole-proprietor business and it is just you doing consultinig work is there an added benefit to cutting yourself a paycheck? How does that affect your self-employment tax situation?

[rschule1]

I don't believe there is any benefit with a self employed person cutting a paycheck. However, there would be  the burden of additional paperwork like payroll tax forms. 

[VolvoGirl · Accepted solution]

If you are filing a Schedule C for self employment or as a Single Member LLC or Sole Proprietor, etc. you cannot take a withdrawal or salary and include it as an expense on your tax return. You are not an employee of the business. You don't pay yourself or enter a salary or withdrawal for yourself. All the business income and expenses are your personal income and expenses in the first place. You just fill out a Schedule C. The net profit or loss is your income. If you have a net profit of $400 or more on schedule C you will pay SE self employment tax on it in addition to your regular income tax. It's all included on your personal 1040 form.

See Schedule C instructions page C-10 Line 26
Do not include salaries and wages deducted elsewhere on your return or
amounts paid to yourself.
https://www.irs.gov/pub/irs-pdf/i1040sc.pdf

[Sjoechapman]

Yes of course. Would that be a way around filing estimated tax because you're paying through your paycheck instead?

[VolvoGirl]

NO.  You can not pay yourself at all.  All the Net Profit is your personal income.  

[Sjoechapman]

Thank you that is exactly what I was looking for appreciate the information

[MariaDG1]

@Sjoechapman   Thanks for participating today.  This a great question.

Sole proprietors don't pay themselves wages in the same sense that an employee would be paid.  You can't cut yourself a salary and withhold taxes as you would for employees.  Sole proprietors pay themselves by taking draws from the company's profits.  This could be done by writing a check from the business account to yourself personally, by transferring money from the business account to the personal account, or simply by withdrawing cash from the business account. There are no rules about how much you're allowed to withdraw.  But you will want to be sure you have an accounting system so you can make sure you always have enough in the business account to cover expenses and obligations.  However you choose to pay yourself, its important to keep meticulous accounting records.   As a sole proprietor, you and your business are the same legal and tax entity.  All the income of the business is your income. However, in order to file your taxes you will need to be able to accurately account for all the funds that go in and out of your business so self employment taxes can be correctly calculated, and all expenses can be deducted.  Its essential to have separate business and personal accounts.  If you have a DBA name, the business account can be opened in that name.  If not, you can get a business account in your own name.  I strongly recommend having a business credit card as well.  If you have commingling of personal and business funds, filing your taxes is going to be confusing, time-consuming, and you could likely draw scrutiny and attention from the IRS that you'd rather avoid.   Regardless of how you set things up, you will be paying both self employment tax and income tax on all the income you generate.  Self employment tax covers your social security and medicare contributions. As you are both the employee and employer in your business, you will be paying the full 15.3%.  (As a W-2 employee in the past, you would have half deducted from your paychecks and the other half paid by your employer.) This is also sometimes referred to as FICA taxes.   In addition to that you will be paying income tax on your income. That amount will depend on which tax bracket your total income falls into, and what deductions you have. You will need to make quarterly estimated tax payments throughout the year on your income, as you can incur underpayment penalties otherwise.  Here are some great resources to help with that:

https://turbotax.intuit.com/tax-tips/self-employment-taxes/a-guide-to-paying-quarterly-taxes/L6p8C53...

https://turbotax.intuit.com/tax-tips/self-employment-taxes/tips-for-paying-estimated-taxes/L1nDU0sUs

https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-common-questions/L1luHqVdl

https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-how-to-determine-what-to-p...

[Sjoechapman]

Do you just have to have one employee?

[LoraineG]

I would like to add to @rschule1's post.  If you are a sole proprietor or single member LLC, you are NOT allowed to pay yourself through payroll.  The IRS doesn't distinguish between you and your company.  You can't deduct what you pay yourself.  You can only take what's call distributions or owner's draws.  You technically don't pay taxes on the distributions, but they are also not deductible.  

The only way will be making the S-Corp election where you are required to pay yourself a reasonable salary or if you choose another legal business entity.  Here's more information:  https://www.irs.gov/businesses/small-businesses-self-employed/paying-yourself.