A common question we get regards paying yourself as a business owner to maximize tax savings. Let’s dive into that!
Many business owners are set up as sole proprietors, either as a sole prop formally or as a single-owner LLC. Both of these entity types are flow through entities that report their taxes on a Schedule C. This is great in certain circumstances. (If you are currently in this situation, please give us a call at 801-692-0032 to find out if this is still a good idea for you.)
The problem comes when it’s time for the business owner to pay themselves. Most of them do so by simply running the business debit card for personal items – essentially using the business account as a personal account or ATM. Do you know what that results in?
That’s right – if you’ve been following us for long, you know the answer is commingling. When you commingle funds, you are mixing up business and personal funds so that it becomes very difficult to determine what belongs to the business and what belongs in personal. Commingling comes in several flavors – putting business expenses on a personal credit card for points (or vice versa), paying personal bills from the business account,using the same account for business and personal, and so forth.
“But it’s all my money!” Yes, it is. Sort of. It belongs to the business, and the business belongs to you. But since you went to the trouble to register your business and get it its own bank account, it works best for everyone if you respect that separation. Remember, accounting is much more than simply filing taxes – it’s an ongoing process to keep businesses in compliance with legal requirements all year, and a means for business owners to make sure they have the information they need for informed business decisions.
Speaking of legal requirements, if you are in the habit of commingling and your business is sued, the judge can easily rule that you have “pierced the corporate veil” you created by setting up an LLC. If that happens, your personal assets can be at stake as well.
So how do you pay yourself? Well, in this scenario (sole proprietor/single owner LLC) you can simply transfer funds from one account to another and we will properly account for it. We recommend making it as sacred as running payroll for an employee – in fact, you should have a set payday, just as your employees do, and you should be transferring those funds every payday. If you do an account transfer, you can mark it “Business Owner – Pay” to satisfy legal requirements.
You can also “borrow” money from your business, but those loans are accounted for differently and actually have to be paid back.
Requirements for S-Corps, C-Corps, and partnerships are different.
Clear as mud? Well, give us a call at 801-692-0032 and talk to us about your unique situation today.
Donna Harris holds a BSci in Accounting and is the owner of Bookkeeping Made Simple. She is currently pursuing her MBA and expects to complete that in June, 2022.
Donna Harris, BSci Accounting, MBA, founded Bookkeeping Made Simple with the understanding that small businesses is the heart of the American economy. After offering to do books for a friend who said he didn't have enough work to keep someone in the office 20 hours a week, she recognized the need for an efficient, online system. She has 20 years of bookkeeping and accounting experience and is excited to help small business owners achieve their goals. She enjoys spending time with her family and traveling whenever possible. She also loves reading, hiking, camping, cooking, yoga, and fitness. A huge believer in lifelong education, she is currently working on her master's in Accounting.