When you started your business, you knew the first few months would be hard. You might even have planned to end your first year with a loss (hopefully not!). But when your business starts to grow and the money stays in the bank, it might be time to start paying yourself. Wohoo! But how is that done? Do you start payroll? Can you transfer money between your bank accounts? Which way is the best? Let’s find out!
You can start paying yourself by making transfers from your business bank account to your personal. This is an owner’s draw, or owner’s pay and will show up on the equity section of your balance sheet. Don’t think you won’t be paying taxes on that money. When you file your taxes, this will be part of the payment you might have to make.
If you are an S-Corp, C-corp, or an LLC taxed as an S-corp, then all owners must be on payroll. The amount must be reasonable to what is expected for an employee in the same industry. The pros for this is that taxes are paid upfront and salary comes on a more scheduled basis. The only con is that you must be paid the same amount as an employee, even if the business isn’t doing well.
This can be an exciting time, but it’s best to choose what’s best for your business. Always ask your CPA what they recommend you do to save on taxes. Also make sure your business is ready if you decide to start payroll. Check out my blog here on how to prevent payroll issues in your QBO and what the different payroll taxes mean.
