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Saturday, September 16, 2023

How to Pay Oneself When Running a Small Business

Whether you’re a start-up or an experienced entrepreneur, it’s important to understand the ways to pay yourself as a business owner. This includes how to pay taxes and how to separate yourself from your owners legally. Aside from the tax issues, it’s also important to consider the owner’s draw and how this can affect your bottom line.

Owner’s Draw

Whether you’re a sole proprietor or part of a partnership, you may have questions about the owner’s draw when running a small business. A draw is a form of payment that allows you to draw funds from your business account as needed. This option is ideal for self-employed business owners who work more than 40 hours a week.

A draw differs from a payroll salary because it’s taken from the equity account. This account represents an owner’s investment in the business and includes all the money they have put into the business. It also includes any profits, debts, and expenses.

Owner’s draws are taxable. You may pay federal or state income taxes on them, and they are also subject to self-employment taxes. Depending on your circumstances, you may be required to pay estimated tax payments quarterly. You’ll also be responsible for paying Medicare and Social Security taxes automatically.


Choosing the right way to pay oneself when running a small business can take time and effort. There are many considerations, so it’s important to do your research. Taking cash out of your business can have tax implications. You also need to ensure that you’re keeping your business finances separate from your personal ones. This will ensure accurate recordkeeping and make your business look more professional.

Paying yourself is a good way to keep your business running smoothly. You can use your business profits to pay yourself a salary, an owner’s draw, or dividends. Each method has its advantages and disadvantages. You should consult an accountant to find the best option for your business.

Paying yourself a salary requires you to withhold payroll taxes from your pay. If you use a payroll service to handle your payroll, they will generate W-2 forms and send them to taxing authorities. This system will also prepare you for hiring employees.

Consult With a Tax Professional

Whether you are starting a new business or already have one, you will need a tax professional to help you with your taxes. You could make a costly mistake if you don’t have experience with tax laws. When you consult with a tax professional, they will know how to prepare your taxes and help you minimize your liability.

You should also ensure that the tax professional you choose is knowledgeable about the specific tax laws in your state. Tax laws change often, and you must be aware of what is legal for your business.

A good tax professional should have strong communication skills. This is a crucial skill because you should be able to share your financial information with them and ask them questions. This allows them to understand your situation better.

A good tax consultant should also have a wide range of financial skills. This includes understanding the tax code, knowing which deductions apply to your business, and having the ability to estimate tax savings.

Legally Separate From Your Owners

Getting legally separated from your owners when running a small business is vital. This is to protect you from personal liability. For example, if your business was sued and you did not pay the debts, your assets may be subject to collection efforts by your creditors. They may even attempt to “pierce the corporate veil” and access your assets to satisfy their debts. This can be extremely costly and result in you selling your assets to pay off the debt.

To legally separate your business and your assets, you must have a separate bank account for your business. This account should only be used for business expenses. It is also important to avoid depositing checks payable to your company in your account. This will keep your bookkeeping clean and help to avoid tax surprises. You can also create a separate credit card in your LLC’s name, which will help avoid personal guarantees.

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