| The form of ownership that you choose to operate | | | | This is not true. The money you withdraw from your |
| your business under will determine the method in which | | | | business is still subject to income taxes and you must |
| you pay yourself a salary. Making this decision in the | | | | report this income on your form 1040. The key point to |
| start up phase requires much research and should be | | | | remember here is that, although you are not subject to |
| handled with care. We choose our form of ownership, | | | | payroll taxes, you are still required to pay into the |
| mainly based on the potential tax consequence that | | | | system by way of self employment and income |
| we expect. Of course, our goal is to pay as little taxes | | | | taxes. The advantage here is the owner gets a |
| as possible into the system, so the form of ownership | | | | deduction on its taxes for paying self employment |
| chosen helps to achieve this goal. There are clear | | | | taxes, where the owner of a corporation doesn't. For |
| advantages and disadvantages based on each | | | | tax purposes you can elect to have your LLC taxed |
| method available. | | | | as a corporation, but be aware that making this choice |
| As a small business, many people survive from the | | | | involves very complex rules and regulations. It's best to |
| earnings from operations. But the key here is to | | | | stick with what makes sense for you. |
| remember to keep your business and personal | | | | Corporations |
| expenses separate. So the questions is, "How do I pay | | | | If you are established as this form of business, the |
| myself, and what impact does it have on my taxes?" | | | | payment to yourself would be made in the form of a |
| Let's look at some of the ways a business owner can | | | | salary through payroll. Under this method, you are |
| pay themselves a salary from the earnings of their | | | | subject to payroll taxes, which include income (federal |
| business. | | | | and state), and FICA (Social Security and Medicare). |
| Sole Proprietors and LLCs | | | | One of the key advantages of corporations is that the |
| Taking money out your business or paying yourself | | | | owners are not liable for self-employment taxes for |
| under these forms of ownership, the owner will be | | | | profits retained in the business. As with Sole |
| responsible for self-employment taxes on any profits | | | | Proprietorships and LLCs, you saw that profits are |
| that remain in the business whether withdrawn or not. | | | | taxed whether paid out or retained in the business. |
| Because this income is not subject to withholding, the | | | | However, a corporation will be subject to |
| owner could also become responsible for making | | | | unemployment taxes for both federal and state. The |
| estimated quarterly tax payments. The estimated tax | | | | employee does not share in this expense. So, the |
| payments will account for both the self-employment | | | | difference here comes in the classification of a |
| tax along with income tax. The self-employment tax is | | | | corporation being an entity separate from its owners. |
| the equivalent of what an employer's payroll tax would | | | | Because of this, it has an entire different tax profile |
| be for FICA and Medicare. The disadvantage here | | | | than the Sole Proprietor or the LLC. The corporation |
| would be that the owner is fully responsible for the | | | | and its owners are taxed separately. Each must file its |
| entire tax, whereas corporations are not. The | | | | own tax form. |
| corporation is only responsible for half of the FICA | | | | Deciding on your method of payment simply comes |
| taxes; Social Security (12.4%) and Medicare (2.9%) tax; | | | | down to how it must be reported for tax purposes. |
| with the employee paying the other half. | | | | Take the time to do the research so that you can |
| Many owners become confused because they | | | | choose the best method based on your company's |
| believe that since they are paying the self employment | | | | profile. |
| tax, that they are not subject to any further taxation. | | | | |