As a new business owner, you may feel some pressure while trying to navigate self employed payroll software rules. How you pay yourself as the owner of a company depends on which of the business structures you select. You will also determine your payment method by the stage of growth of your business.
Your first priority as a new business owner may not be paying yourself. As others can attest, you will have a lot of other responsibilities while building up your business. Know the factors that you need to consider and choose the best payment method fit for your specific needs.
How to Pay Yourself
You can pay yourself using two different methods as a business owner. These include:
Salary – You can elect to pay yourself a regular salary like any other company employee. After you choose a self employed payroll software, you will withhold taxes from your own paycheck. You must withhold the taxes if you set up your business as an S-corporation, C-corporation, or as a limited liability company. You must meet the Internal Revenue Service’s standard for a “reasonable” compensation. It means you must align your salary with other people in your industry who work in the same role.
Owner’s Draw – As the owner, you can set up your business with an owner’s draw. That means you can draw cash or similar funds from your business’s profits as you need them. You can take as much as you put into the company, or the owner’s equity. You do not need to pay taxes after you withdraw funds every time. However, aim to regularly set aside some money. That way, you can budget ahead for your tax bill.
Pros and Cons of Salary vs. Owner’s Draw
Before making big self employed payroll software decisions, it helps to know payment pros and cons. As a salaried employee, you will make a stable income. Moreover, the Internal Revenue Service will deduct your taxes upfront. However, some may see a salary’s rigidity as a drawback. You must align your salary within reasonable compensation guidelines. That does not change, even if business slows down for one month or year.
The inverse applies to you setting up an owner’s draw for your company. You will have greater flexibility with your payment. Specifically, you can determine how much you draw based on the business’s growth or any downturns. Alternatively, you will need to do some extra work. As the owner, you will have to budget for your year-end tax bill.
Why Use AMS’ Software System
If you decide to venture into the world of self employment, prepare yourself. You need to make sure you know which mistakes to avoid, like not budgeting for taxes. You can avoid these kinds of mistakes by using a self employed payroll software system. Our payroll software will calculate local, state, and federal payroll taxes. Similarly, we include and update the state and federal tax tables as needed. Knowing the rules and selecting the right software will help you to succeed in your business endeavors. Plus, you’ll have access to our W2/1099 Forms Filer, which is among the most helpful software tools available.