Ways Sole Proprietors Pay Themselves
- Owner’s Draw: As a sole proprietor, you can take money out of your business for personal use. This withdrawal is commonly known as an “owner’s draw.” Simply transfer funds from your business account to your personal account. This is a straightforward way to access the profits your business has generated.
Methods of Payment for Sole Proprietors
- Salary: You pay yourself a regular salary just as you would an employee of the company, withholding taxes from your paycheck.
- Owner’s Draw: You draw money (in cash or in kind) from the profits of your business on an as-needed basis.
Sole Proprietor’s Pay Method
As a sole proprietor, you have flexibility to pay yourself in various ways. Determine a reasonable salary for yourself based on profitability and financial needs. One common method is taking an owner’s draw, transferring money from the business account to your personal account.
Sole Proprietor Salary Taxation
Sole proprietors are considered self-employed and are not employees of the sole proprietorship. They cannot pay themselves wages, cannot have income tax withheld, and cannot receive a Form W-2 from the sole proprietorship.
Sole Proprietor’s Financial Structure
In a Sole Proprietorship, paying yourself differs from paying employees. A Sole Proprietor is self-employed but not an employee. While having employees, a Sole Proprietor cannot pay themselves wages or salaries. Sole Proprietors pay themselves by taking draws from profits.
Hiring Your Spouse
As a sole proprietor, you can hire your spouse to be an employee. But, your spouse must be a legitimate employee.
Business Profit vs Personal Income
In other words, after you’ve deducted expenses, the remaining profit is considered personal income.
Paying Yourself as a Sole Proprietor
They cannot pay themselves wages, cannot have income tax, social security tax, or Medicare tax withheld, and cannot receive a Form W-2 from the sole proprietorship.