If you’re the sole proprietor and only employee of a business, how do you get paid? As in how do you do the accounting and taxes to transfer money from the business account to your personal account for the things in your personal life, mortgage, groceries, etc. Do you pay yourself a regular and constant salary? Do you just transfer money between the business acct and personal acct as needed? What if you’re pretty flush in the business account and want to give your wife a new car for her birthday so you take a large amount of cash out - does that go in the books a bonus paid to yourself? I’m assuming at the end of the year you’ve got to account for all this to the IRS - the business pays taxes, and the sole owner/employee pays taxes separately - am I wrong on this?
A sole proprietor can pay himself as needed, weekly, monthly, whatever schedule he wants to. The individual is responsible for paying estimated taxes to IRS and to their State on a quarterly basis. The only time the amount of pay matters is when calculating taxes. The business does not pay a separate tax.
The IRS encourages one to keep separate business and personal accounts. That is so that the personal expenses won’t get mixed up with the business ones and make tax time a chore.
Personally, I simply transfer money from the business account to the personal one on an as-needed basis.
I am not a tax professional. I only know this because I’m a sole proprietor.
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It depends on the business. Some folks pay themselves a salary; others take distributions as money comes available. Sometimes a small business owner will loan money to the company, and then take money back as repayment of the loan.
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Most small businesses are either disregarded entities (S Corporations and LLCs) or sole proprietorships, which don’t ordinarily pay taxes.
we make the money and then pay taxes as personal income just like everyone else. You take business deductions such as fuel, office equipment etc and pay tax on the balance. No special accounting needed, your car example would not be deductible as it is not business related but there is nothing stopping you from buying her the car.
In canada you dont need to pay GST (goods and services tax) until you hit 30k.
If you’re the sole proprietor and only employee of a business, how do you get paid?
I’m sure it varies.
** As in how do you do the accounting and taxes to transfer money from the business account to your personal account for the things in your personal life, mortgage, groceries, etc…Do you just transfer money between the business acct and personal acct as needed?**
That’s what I do.
Do you pay yourself a regular and constant salary?
Some do.
What if you’re pretty flush in the business account and want to give your wife a new car for her birthday so you take a large amount of cash out - does that go in the books a bonus paid to yourself?
That would probably be the way if one takes a regular salary.
I’m assuming at the end of the year you’ve got to account for all this to the IRS - the business pays taxes, and the sole owner/employee pays taxes separately - am I wrong on this?
In my case, yes. While the business pays certain local taxes, it doesn’t pay separate income tax. I file a schedule C - Profit or Loss From Business - along with a form 1040. The profit from the business is essentially my income, which is listed on the 1040, as is the salary my wife gets from her job.
Mr. Athena and I are both self-employed.
The way we do it is we each have a “business” checking account, and we have a joint personal account for paying bills out of, and a savings account.
When we get a check, it goes into one of our respective business accounts. We each reserve a portion of the money for taxes and other business expenses (as software engineers, we have very little business expenses, but there are things like the ISP bill and the cell phone bill that “the business” pays), and the rest gets dumped into another account (either our joint account or a savings account, depending on how the month has gone.)
From what we gather from our CPA, in our situation it doesn’t really matter which account we pay the business or home bills from. What matters is that we keep track of our business expenses, and as they’re pretty small it’s not very hard to do that without having strict business versus personal expenses. For example, last year Mr. Athena bought a new computer. We paid for it out of our joint account, but forwarded the receipt to our accountant as a business expense. He has no problem with that.
Well, my sole proprietorship is a service business – I don’t have to handle inventory and such – so I’m not required to keep a separate business account because the business is just me, myself, and I. I used to have a second business that had inventory, and I kept those accounts separate. Running TWO businesses out of one personal account is just asking for trouble.
I track expenses on a spreadsheet and report them on Schedule C, Profit and Loss from a Business. When checks come in, I lop off 30% and stick it in my “Uncle Sam” savings account, which I use to pay estimated taxes every quarter. (I let my tax preparer do the math.) It usually comes out to something like 26% of gross, which leaves a little extra for property tax and house insurance.
I keep the other 70% and use it for my personal expenses as well as anything for the business (usually just office supplies and postage, and computer equipment now and then). As long as I separate the business expenses on paper, Uncle Sam doesn’t care what account the money came from.
So no, I don’t pay myself a regular salary, although many SPs do. When there’s a surplus, I stick it in a separate cushion savings account against times when cash flow is bad. They say you’re supposed to have at least six months’ living expenses in there, but I’m usually lucky if I have two. Sometimes, if it’s not too close to the end of a quarter, I’ll borrow from the Uncle Sam account against an incoming check; if the check will be $1000, the tax would be $300, so I’ll take $700 from Uncle Sam and then deposit the entire check to Uncle Sam when it comes, thus covering the $700 I borrowed plus depositing the $300 in tax as usual.
A sole proprietorship does not pay separate taxes. The profit reported on Schedule C is counted as my personal income and taxed as any other income would be. The only extra tax I pay is the employer’s half of SS.
I think I covered your points.
Thanks for the replies - So my original assumption of separate business & personal income taxes was incorrect. This means that if you have a great year and make a lot of money, you wind up paying a lot of taxes. What if you’re living frugally for a year to save up cash for a large (say $75k) capital investment? Like a new excavator or something? Do you have to buy it before EOY to avoid getting bumped up to a higher tax bracket, or can you do some kind of previous year tax adjustment if you need to wait until the next year to make the large purchase?
BTW, I have no intention of starting my own business. But my BIL, whose financial acumen seems to extend to making sure there’s always enough cash in his wallet to buy beer, has been running his own successful excavating business for a decade now, and I’ve always wondered how it works.
Like so many other things, it depends on the location. While responses so far have been to the US and that’s where the OP was asking about, mileage does vary for other places.
In Spain there’s four different ways for a person to be sole propietor:
Autónomo (self-employed, my own version), where the person “is” the business, to the point of having the same Tax ID number. Keeping separate accounts is recommended just for clarity of mind, but if I manage to blow up a client’s computers they can come after my car and my mortgage, both of which are owned by “me physical person” and not by “me business.” I have to pay VAT and income tax every 3 months, social security monthly, no company tax.
Sociedad Limitada (limited responsibility) and Sociedad Anónima, where the owner/employer/employee’s responsibility is limited (to different levels). They must keep separate accounts. They must pay SS monthly, VAT every 3 months, company tax yearly, income tax yearly (but only on the part the “legal person” paid the “physical person”).
Sociedad Anónima Unipersonal, this is most commonly used for what’s actually the Spanish branch of a multinational corporation originating in another country. The Spanish “President” (gerente) is the owner of a tiny amount, the foreign company owns the rest; there are some things for which the gerente is personally responsible and others for which the foreign corporation is.
All of these can have employees and pay them in any way they want so long as it’s according to the EGT (basic labor law), SS law and reported to “IRS”.