A small, or sole, proprietor is someone who holds no formal business structure registered, but runs a business by themselves. This makes many wonder how exactly a sole proprietor gets paid. They must, since it is the most common business type in the U.S. To say a sole proprietor gets paid is incorrect- they make money. Getting paid implies you are an employee, which you are not as head of the company.
Since a sole proprietor runs a business alone, they can withdraw money from it whenever. It is technically called a draw, and is not qualified as a salary. If no money exists to be taken from the company, then no money can be drawn out. Of course, you technically can withdraw more money from the company than its excess, but how will you pay the business’ bills?
Knowing How To Do Taxes As A Sole Proprietor
When filing taxes as a sole proprietor, business taxes are not separate than personal taxes. Taxes are filed on a Schedule C and any profits/losses are added to the sole proprietor’s personal 1040 form.
When you are a sole proprietor, you can take money from your business. The money is only taken if it is excess (more than the expenses.) On taxes, no salary will be found on your Schedule C, since you do not make a salary as owner of a small business.
It’s Not A PayCheck – It’s A Draw
When you draw money, it is easily documented by using checks. That is the common and most widely-used way to take a draw. To stress this, no taxes are taken from the draw, not federal, state or FICA, since you are not an employee and this is not a paycheck.
By putting your money into a business you own, you can ultimately take money out accordingly. This is called a draw. Capital accounts are increased by the business profiting. All profits are delivered to the capital account. Say the company’s revenue is 3,000 for the month, and expenses are $1,200, the remaining $1,800 is able to be drawn. Thus, if the company’s profits exceed the company’s expenses, you can use those finds for your rent, or food, or other life expenses.
Paying Taxes on a Draw
The owner of the business who is taking a draw from the company does not pay taxes on that money they taking a draw. Taxes for the business as a whole are taken
The taxes due on your business are calculated on the Schedule C with its net income. This does need done yearly and put with your personal Form 1040. This makes it taxed just like any source of income. This can seem like sole-props lose money, since they pay taxes on a large amount of money than they are accessing. However, there are positives and negatives to every tax filing status.
Let’s Spell It Out
For example, an owner draws money from the business monthly. At the end of the year, draws equal $35,000. That amount is not shown on the tax return. A net income of $37,000 is shown on the Schedule C, then that $37,000 of net income is included in personal tax forms.
The income of the business is what you will pay taxes on, not just the draws you make from it. All taxes are paid from profitable income, and go through the process of all who claim self-employment. Like in the example just stated, you pay taxes on the total $36,000 of revenue.
Small proprietors get paid only when a business if profiting. It is not considered a salary, or paycheck, or any of the sort. Think of the state of your business and how much excess funds are available before making a draw. On top of that, keep all finances in mind when becoming knowledgeable about tax-filing procedures.