To someone who doesn’t own a small business, this sounds like a strange question. But to my super-sonic CPA ears, this is a very familiar inquiry made on multiple occasions each year as we meet and strategize with start-ups.
I have come to realize that the question isn’t really “how do I pay myself,” but more “how is my compensation treated for tax purposes?” Let’s take a quick look at that question, as it pertains to self-employed individuals and corporate shareholders.
Self-Employed Schedule C Filers:
The compensation issues within a partnership are complex, and beyond the scope of this light-hearted blog post. I’d recommend that you make an appointment with a professional who works with partnerships and ask your questions there. Of all the compensation misunderstandings I have dealt with, most of them come from partnerships.
Business owners misunderstand payroll on many levels. In the self-employment world, draws are not considered payroll. In the corporate world, it’s a requirement for the shareholder/employee. No matter the entity, compensation is a planning tool and should be regarded with the power it possesses.
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