How to Pay Yourself as a Creative Business Owner?

Apr 12

Your business is starting to make a profit and you have decided to start bringing some of that back home… but how are you supposed to go about paying yourself?

The way you pay yourself depends on the tax structure of your business.

The most common ways businesses are structured are sole proprietor, LLC, and S Corp. Sole proprietors and LLC businesses are taxed the same and get attached to your personal tax return on what’s called a Schedule C. S Corporations on the other hand are taxed individually.

Keep in mind that an LLC can be taxed as an S Corp if you have made the S Corp election with the IRS.

LLC & Sole Proprietors

As an owner of an LLC or Sole Proprietorship, you pay yourself through Owner’s Draw. Simply transfer money from your business bank account to your personal bank account. These with draws are counted as profit in your business and taxed at the end of the year so make sure you set aside money for taxes. I recommend 20%-30%.

S Corporations

According to the IRS, an owner/shareholder of an S Corporation must pay themselves through payroll. This looks very similar to a normal job where you would get a W-2 at the end of the year. The salary of the owner/shareholder is listed as an expense on the Profit & Loss statement and the owner/shareholder will pay personal tax on that at the end of the year.

If you are an S Corp, you also have the option to take draws (distributions) on top of your owner’s/shareholder’s salary. You just have to make sure you are staying compliant with the IRS standards on how much you pay through payroll and how much you take through withdraws.