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  • Don’t Forget to “Pay Yourself”

    Can I use some of the money to enjoy the fruits of my labor without putting myself on the payroll right away?

    I recently formed a recording studio as an LLC, but I am anxious about all the income going into accounts receivable and having less immediate income for me and my family. Does this money circulate within my business only to pay business expenses, or can I use some of the money to enjoy the fruits of my labor without putting myself on the payroll right away? —J.U., Phoenix, Ariz.

    Since you formed your company as a limited liability company, as the owner you are considered a “member” of the LLC by the Internal Revenue Service. If you’re a one-member LLC, the IRS will treat your company the same as a sole proprietorship for tax purposes. While you can hire employees, you will never put yourself on the company payroll since you are not considered an employee.

    Instead, when you want to take money from the company, it will be in the form of an owner’s draw, says Jim Sharvin, a CPA with McDowell, Dillon & Hunter in Torrance, Calif. It is as simple as writing a check from the company to yourself and depositing it in your personal account, which should be kept separate from your business accounts.

    “You may use money from the business for yourself, but know that the money you take out of the business will be subject to taxes at the individual tax filing level and subject to self-employment taxes,” says Lisa Schwartz, a CPA with Mitchell & Schwartz in Camarillo, Calif. In 2012 the self-employment tax rate is 13.3 percent for business owners on the first $110,100 of income and 2.9 percent on any income more than that amount.

    For practical purposes, this means you’ll need to keep track of all your draws and set some of that money aside for taxes if your business is profitable. After your business gets established, you will pay self-employment tax in estimated quarterly payments to the IRS—something that can come as a shock if you’re used to being an employee and having taxes withheld from your paycheck.

    Along with self-employment tax, you’ll need to remember that your recording studio’s 2012 profit or loss will be reported on your personal income tax return next April. If you make a profit, you’ll pay both self-employment and income taxes on that amount whether you have taken it for personal use or not.

    Read Full Article in Bloomberg/BusinessWeek.com

    Good luck.

    Calvin Wilson
    Founder and CEO
    Upstart: Business and Management for 20-40 Year Old Professionals

    Filed Under: Startup/Entrepreneur


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