If you’re a small business owner, you may be the last person to get paid after all bills have gone out and you’ve met payroll for your employees. But depending on your business structure, you may also need to add yourself to your company payroll. It’s important to completely understand the structure of your business and classify yourself properly. You should consult your accountant or attorney for advice. With that said, the Internal Revenue Service provides general guidance for business owners on the subject. Here are a few of the main points from their website:Sole proprietorsIf you are a sole proprietor of your business, use a draw account to show money or other forms of payment you take from your business.
Todd Schmitt, controller of Patriot Software, Inc., added that sole proprietors looking for a consistent compensation method can use a weekly, bi-weekly, or monthly draw schedule. As a sole proprietor, you can supplement your income quarterly or annually, based on your business performance during the period, Schmitt says.
If you are a partner in a business, you are not considered an employee. You should also use a draw account to show money you take from the business, the IRS says.
According to Schmitt, partners can take "guaranteed payments" for service rendered. Since they are not considered employees, there are no withholding taxes to worry about. Payments are deductible by the partnership (unlike draws for a sole proprietor). These payments are considered taxable income to the partner for both income taxes and self-employment taxes. As a partner, you can also receive certain fringe benefits from a partnership, though you must report the value of such benefits as taxable income personally, Schmitt says.CorporationsIf you are a corporate officer, then you are generally considered an employee. (And as an employee, you would have payroll deductions for income taxes, Social Security, Medicare, etc.) However, according to the IRS, “an officer who performs no services or only minor services, and who neither receives nor is entitled to receive any pay, is not considered an employee.” For more information, refer to "Who Are Employees?" in Publication 15-A, Employer's Supplemental Tax Guide.Note: How do you know how much to pay yourself? The IRS has a standard called “reasonable compensation.” According to the IRS, “wages paid to you as an officer of the corporation should generally be commensurate with your duties.” For more information, refer to “Employee’s Pay, Tests for Deducting Pay” in Publication 535, Business Expenses. A word about treating yourself as a nonemployee: If you issue a 1099 to yourself instead of adding yourself to your payroll, you may be liable for Social Security, Medicare, and income tax, as well as a possible trust fund recovery penalty if the IRS determines you should be an employee instead.