As a small business owner, especially just starting out, it can be surprisingly difficult to understand how to pay yourself. You don’t just get what is leftover from paying bills and any other salaries. You need to have a clear form of payment, which is where a San Antonio TX CPA can come in handy to help you determine your personal salary.
While you can choose to draw a salary and/or take draws from your profit, you need to determine which is the most sensible when it comes to taxes. Your type of business will also play a role in which method you choose.
Generally, if you take a salary, you will pay yourself just as you would any other employee and you can deduct taxes up front, creating a more stable and predictable approach. Alternatively, with an owner’s draw, you withdraw funds from your business at regular intervals, taking more when profitable and less when profits are lower. There are pros and cons to each.
The pros of taking a salary include a set income guarantee, retirement contributions and services, and even unemployment benefits should your business go under. The cons of taking a salary mean you are required to pay yourself, which can be a burden during low periods. You will also pay more in taxes because you will be required to pay Social Security, Medicare, and unemployment taxes. That also leads to the need to set up a payroll system and calculate taxes, which can be confusing.
The pros of an owner’s draw include flexibility in taking as much or as little as needed with fewer constraints. You also have fewer taxes to deal with because you are not subject to the same salary taxes, nor do you have to set up payroll and calculate taxes accordingly. On the other hand, the cons are that you don’t have the security of an income because you are at the whim of the success or failure of your business, so you may have periods where you cannot afford to take an owner’s draw. You also don’t have money going toward your future retirement, and you’re also not eligible for unemployment.
If your business is a sole proprietorship, LLC, or partnership, an owner’s draw may be a better choice for you. If your business is an S or C corp, then a salary is probably more beneficial.
Ultimately, there are a number of other factors that go into which choice you should make, not to mention how much you should take if you do choose a salary. This varies among industries, states, and other business elements, so your best choice is to turn to an experienced San Antonio TX CPA like the ones at Gonzales Group. If you’re starting a new business, contact us to help you determine your best course of action when deciding how to best profit from your new business.
This post was written by Gonzales Group CPA