Create a Self Employed Invoice Example for Nonprofit Effortlessly

Self employed invoice example for Nonprofit

how exactly should you pay yourself as a business owner is it as simple as transferring money from your business account over to your personal account or is it as complex as putting yourself on payroll and paying yourself W2 wages well in this video you are going to learn the correct way to approach this once and for all if you're new here my name is Sherman the CPA and I specialize in tax planning for businesses with over one hundred thousand dollars in income over at mycpacos.com my clients come to me because they don't want to pay Uncle Sam tens of thousands of dollars in extra taxes then they actually have to pay and I help them accomplish this through a variety of different ways but one key way is by helping them find the best way to pay themselves from their business there are tax consequences associated with the method you choose to pay yourself from your business there's income taxes self-employment taxes payroll tax says capital gains taxes and more to consider when you are choosing the best method and when it comes to those payment methods you can take owner's distributions owner draws W-2 wages and dividends from your business and the method you select should be appropriate based on your business type so an LLC May pay themselves differently from an S corporation which is different from a C Corp and so on so let's walk through all of this in the simplest manner to help you figure this out once and for all foreign [Music] so let's start with the simplest way to pay yourself from your business owners distributions also known as an owner's draw an owner's draw is simply the act of withdrawing money from your business and you make an owner's draw every time you take money out of your business account and transfer it over to your personal account you can withdraw cash write a check submit a wire transfer and so on from the business to its owners to make an owner's draw but how exactly are owners draws text this is very important to understand and it depends on your entity and some entities have more rent tape than others but also pay less taxes which we'll talk about a little bit later in this video all right so let's start with pass-through entities like sole Proprietors Partnerships and llc's that are not taxed as corporations if you are not a corporation then chances are that you are a pass-through entity and all this means is that in the eyes of the IR IRS your share of business income passes through to you personally which just means that all the money your business earns is considered your personal income if you own all of that business and the tax you pay on that income will depend on your individual tax bracket which also takes into account all other forms of income you receive and report on that return now here's the thing as a pass-through entity the IRS considers you and your business one the business income effectively adds to your personal income on your tax return which is Big because this means that you will be taxed on your business income regardless of if you took any owner's distributions or not a lot of my clients get this confused they think that they pay tax on the money they pay themselves out of the business but that is not the case with some entities you pay tax based on your share of business income so if your business earns one hundred thousand dollars in income and you pay yourself nothing you are still going to pay tax on that one hundred thousand dollars and this is because your business must report all income and expenses on its own tax return and whatever is left in profits is what will flow through to your personal income and be taxed to you so basically the IRS is not very concerned about your distributions they are going to tax your business profits on your individual return and as a pass-through business not only are you going to pay federal and state income tax but you are also going to pay that nasty 15.3 percent self-employment tax which is avoidable in some of the other entities here which makes this a good time to talk about owner's distributions from s corporations so the good thing about s corporations is that they are not subject to self-employment tax but they are so subject to some additional compensation rules first you can take owner's distributions from an S corporation but only after you have paid yourself a reasonable compensation to all of these shareholder employees or officers that actively participate in the business so the owners of s Corps have to put themselves on payroll and pay themselves like an employee prior to making distributions to themselves the way I explain this to my clients is that you typically get a salary for the work you do and the S Corp and then you get distributions for the share of ownership you have in that S Corp but secondly and most importantly when it comes to owners distributions there's another area that typically catches my clients by surprise and that is capital gains taxes so with s Corps the IRS does not consider you and your business one so when the business sends money to its shareholders those are two separate entities transacting there so because of this distributions you receive from an S corp can be taxable if your distributions exceeds what is called your basis now basis basically represents what you contributed to the business plus your share of profits in the money you pay yourself from the business decreases your basis and when your distributions exceed that number it is now taxable so for example if you have a basis of five thousand dollars and pay yourself eleven thousand dollars in distributions you would pay additional taxes on that excess six thousand dollars that you paid yourself beyond your basis now if you want to learn more of this make sure you subscribe to our Channel but in short if you are not a corporation you do not pay tax on your distributions you will pay tax on your business profits which includes a self-employment tax but when you are taxed as an S corporation you typically do not pay tax on owner distributions but can if they exceed your basis in the business s Corps do not pay self-employment tax but you will pay some payroll tax on the salary you take from your business which we'll talk about in just a second here but then there's C corporations so with C corporations you are taxed twice distributions you take from the business are taxable technically they are considered dividends in this case and the business profits in the C Corp are also subject to corporate income tax plus if you take a salary you will also pay some payroll taxes so you're kind of taxed in almost every way with C corporations except self-employment tax for my clients I help them pick the best entity to pay themselves from and most importantly help them pay the least amount of taxes anyway so far we've only addressed owners distributions but let's talk about the other side of this equation which involves putting yourself on payroll specifically when should an owner put themselves on payroll and take W-2 wages from their business so in short if you are not a corporation then it normally does not make sense to put yourself on payroll for starters you are not required to which means if you do you're just signing up for more payroll taxes and added complexity beyond what is necessary so if you are in a sole proprietorship partnership or LLC that is not taxed as a corporation you can and likely should only pay yourself with owner distributions now some of my clients that do put themselves on payroll in these types of entities think that they have to which is just not the case but one common reason I hear for doing this is that some people think that they need to have W-2 income in order to qualify for loans like car loans real estate loans or business loans but remember all of your business income is considered part of your individual income and bankers will typically review your business income when considering loaning money over to you and they may also ask you for your tax returns financial statements or bank statements to support your business income so typically only shareholders of s corporations or C corporations should take W-2 wages from their business this is because corporations do not pay any self-employment tax so the IRS recoups this by adding payroll taxes on the W-2 salary they receive for the work they do in their business and a common tax saving strategy is to take a payroll salary that is significantly less than your business income which can save you thousands of dollars in avoided self-employment taxes however like I said earlier there is a lot of red tape on things like this and the salary you take has to be reasonable though this is something that we help our clients determine over at mycpacost.com any anyway when you are a corporation you can pay yourself wages and still take distributions or dividends from what is left in the business and if you are interested in forming an S corporation or learning more about payroll then subscribe to our Channel because I have great guys that can teach you on how to do this thank you for watching as always and I will see you in the next episode