How To Pay Yourself When Self-Employed
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When you’re self-employed you probably want to get paid.
So you think you should pay yourself.
At least a little somethin’, amirite?
You are the business owner after all!
I mean, you do have bills to pay.
Unless you live with family or are taken care of I guess!
But let’s stay on point here lol.
How do most people take money out of their business for personal expenses?
By writing a check and taking it to your financial institution to deposit.
Or doing a mobile deposit.
Or simply transferring money whenever they need it.
Some people I have worked with have made transfers as many as 3-4 times a week.
That is a horrible way to pay yourself no matter how you look at it, but not uncommon.
Why?
Because, just like anything else, there is a right way and a wrong way to get money out of the business to take care of personal expenses.
And just to be clear, when I say “pay yourself” I’m using that to describe the act of taking money out of your business to use for personal purposes.
The Problem With Taking Money From A Business
The money that comes into a business is meant to be used strictly for business purposes.
That means it can only be used for paying for:
- supplies
- business rent
- running payroll
- marketing costs
- your business website & all its related costs
- and anything directly related to the operation of the business.
That money is not to be used to pay for your:
- mortgage payment
- grocery delivery services
- utility bills
- car insurance premiums
- anything for your kids
- personal vacations
- or anything else that has nothing to do with the business.
If you work from home, you can take a reasonable portion of certain household expenses such as phone, power, cable television & internet, or auto-related outlays.
Sometimes, however, it is necessary to take money out of the business in order to cover some personal expenses…
The Wrong Way To Pay Yourself
Lots of people who own small businesses don’t know how to properly handle the task of taking money out of the business.
Unfortunately, many also don’t feel like they need to work with a tax accountant because they can “Google what they need to know”.
They simply make payments for their personal expenses out of the business bank account or use the business credit card for those personal expenses.
Some even head over to the ATM machine and take cash out of the business for no other reason than to have some pocket cash.
None of those methods are even close to proper.
Another thing I’ve been hearing as of late is incorrect advice for sole proprietors and single-member limited liability company (SMLLC) members, or the partnership partners to sign up with a payroll service and take a salary.
While in theory that’s a sensible option and helps to alleviate the headaches of paying self-employment tax each quarter, it’s not permitted.
A sole proprietor can have employees but they cannot be employees.
If anyone recommends that you pay yourself by putting yourself on salary as either a partner (of a traditional partnership without S Corporation status) or a sole proprietor you should ignore them and seek advice elsewhere!
The Correct Way(s) To Pay Yourself
Let’s face it, starting a business wasn’t done just to put in work and get no reward.
You want to get paid for your time and effort.
If you need to access money for personal reasons, there are three acceptable methods for doing so:
- Putting yourself on salary and taking payroll checks (if an S-Corp)
- Writing a check to yourself in the form of a distribution (again, if an S-Corp)
- Schedule regular draws (if you’re a sole prop or Single-Member LLC) instead of random withdrawals
You should always create some sort of separation between business and personal expenses, and taking either of these steps does so without drawing any unnecessary attention to the transactions.
Setting yourself up with regular payments, even if they aren’t actual “salary” checks helps not only keep the business looking legit, but it also helps people budget better because it simulates a regular salary like before they took on the entrepreneurial venture.
It also creates a paper trail, which keeps you in a good position if/when it comes to…
Getting In Trouble By Not Paying Yourself Properly
So what’s the worst thing that can happen if you don’t keep your business and personal money and expenses separate?
If you continue to treat your business as your personal piggy bank?
Bottom line is that if you are ever looked at for any reason by the IRS, a whole lot actually.
The first that that would happen is that you would have to undergo an audit, during which the burden would lie on your shoulders to prove that the expenses in question are valid business expenses.
It is your responsibility to show proof in the form of receipts or invoices that can support your claims.
If you cannot, then the fun really begins.
If you happen to be a C-Corporation, then the tax return would be recalculated with all of the expenses added back.
What makes this particularly troublesome is that C-Corps can be taxed at higher rates than individuals.
Not only that but you will be assessed interest and penalties on the unpaid portion of the newly calculated tax liability.
If the business is a partnership or an S-Corporation, the expenses will still be added back to the tax return, but it gets a little dicier from there.
Since those business formats flow through to the personal income tax return, you not only have to have your individual return recalculated but the additional income may in fact cause you to be phased out from deductions and/or credits that were originally claimed.
Let’s also keep in mind that if you have a state income tax, your state return will be affected too.
From there, your new income tax liability will be computed and you will again be charged penalties and interest on the unpaid portion of this new figure.
Additionally, you will now be on the IRS’s radar and the chance for future reviews and audits will increase.
On top of that, if you needed to raid the business accounts to support your personal lifestyle, then you will be in even greater trouble once the interest and penalties start piling on.
“How Much Should I Pay Myself?”
This is something I get asked regularly:
Hey Eric, I’m newly self-employed, can you tell me or help me to figure out how much I should pay myself?
Dozens of entrepreneurs
It’s not a bad question.
In fact, it’s a sign that they are thinking about things in the right way.
The answer, however, is difficult to come by.
It’s like most things in life, the answer is: it depends.
Everyone has a different circumstance and family situation to consider when coming up with a figure to pay yourself.
Another thing that factors into the equation is whether the business is profitable or not.
Obviously, if your business is losing money, you can’t pay yourself.
The best way I have found to answer the question of “how much should I pay myself” is to do this:
- Make a budget for your personal needs
- Figure out how much in total you will need to pay yourself in order to meet the budget
- Divide that number in half
- Pay yourself one half on the 15th of the month
- Pay yourself the 2nd half on the last day of the month
This essentially acts like a regular paycheck which makes it easier to maintain a budget.
If, however, you can’t pay yourself that amount in full, then simply pay what you can.
The point of this exercise is to make it so that you aren’t constantly dipping into your business money to pay for your personal expenses.
So now you know the answer to the question “How much should I pay myself?” should you be wondering?
Wrapping Up
Well, that’s the basics on how to pay yourself as a self-employed “boss”.
Granted, no one article can ever address everyone but this should help the majority of you.
Keep in mind 2 things:
- Nothing is written in stone–you can schedule it however and use any dollar figure you wish.
- These aren’t “rules” or “laws” just guides to help keep you out of potential trouble and make it easier to manage your business plus your money.
I urge you to adjust these guides to suit your own individual situation.
And one last thing:
A BUSINESS IS NOT YOUR PERSONAL PIGGY BANK!
Your Turn
How do you pay yourself as a self-employed person? Do you just take money out of the business account whenever you feel like it? Do you have a schedule? Do you leave the money in the business account and simply pay yourself whenever you want to bring that balance down?
I love the simplicity of this article and also Business is Not Your Personal Piggy Bank.
We are in the last legs of gathering evidence to prove our partner is in breach of his fiduciary responsibility, I’ve been reading everything I can from numerous websites and we are in the exact situation as you describe in these articles. Every thing you say can happen is happening by our partner to us. Hes the managing partner and If i was looking for an attorney, I would contact you. I cant wait for my husband to read your articles, when he wakes up. Hes very passive and I need him to put our partner on notice the next day or so that we want out non-contested end of our partnership. im going to read more thank you
Thanks, but I’m the last person you’d want to hire since I’m not a lawyer. In fact, nowhere do I ever claim to be or give out legal advice.
However, I am glad you got some value from these types of articles and were able to use them to get a better picture of what was going on in your own business!
I cannot emphasize enough how important it is to have a separate bank account. I’m a blogger/health coach and my tax professional filed a schedule C with my taxes and it triggered an IRS audit. Even though I had receipts for everything I claimed and the expenses were obviously business related (FB ads, Aweber, Leadpages, etc) my appeal was denied (I appealed 2x then gave up) and I had to pay the IRS 🙁 Now I’m having to get a DBA and business license in order to even open a business bank account and set things up in a more formal way.
Thanks for reading Gail!
Sorry you had to go through that hassle with the IRS. I’ve got to be honest, I’ve never heard of the IRS denying legit business expenses solely on the basis of not using separate accounts.
I’d actually recommend speaking with a tax attorney to see what can be done about that., and if the tax preparer did something wrong to cause your issues, they should be paying for any penalties and/or interest you incurred plus your fees to get it straightened out.
But yeah, it’s always preferable to do all of that right from the start because of the headaches of having to redo all of it mid-stream. Good luck moving forward!
I am a LLC – sole pro.
I use my business account to pay for everything.
mortage, supplies, electric, etc.
Are you suggesting I pay myself monthly from my business account into a personal account and pay from there? would i have to file two separate taxes at the end?
and if money goes into business account not earned by work do i have to add that into income. example transferring money from personal saving to pay taxes and into SEP.
thanks
Well, Shakti those questions are the exact reason you need to keep things separate.
First, if you have everything separate you don’t have to worry about whether or not to include all the money going in with income. All money going into the business account will be your income and taxable.
Then you will move the money to your personal account where you pay all of your living expenses.
You only file one tax return with the IRS as a Single-Member LLC (but you may have to file a separate return with your state).
Hopefully, you only just set this up in 2018 because if you did it further back then it sounds like you may need to get someone to check it out to ensure you didn’t do anything wrong.
Good luck!
Eric,
I’m the controller for an S Corp. with three owners. We have set-up a draw account for each owner and each take a normal monthly draw. Recently, one owner went to an attorney to have him write a letter to one of the other owners addressing the sale of shares of stock. What is the legitimately way of coding the attorney fee? Should I code it as a legal expense to the company or as part of the draw to the owner who retained the lawyer?
Hey Troy!
If the one shareholder paid the attorney for his own interests, then it is not a company expense, but a personal one which needs to go against their own distribution account. Because the individuals own the shares and the communication was between just two of them regarding that personal holding, it is a personal matter. If/when an attorney is engaged to redraft the operating agreement or anything pertaining to the business itself, that can be deducted as legal expenses.
Speaking of distributions, I’m hoping you meant that they each get a distribution in addition to regular payroll checks each month!
Hey I work at a place where we believe the owner is using our payroll account to pay for his lifestyle. When our paychecks come out once a week there isn’t enough money for us to cash or deposit them when we get them. We end up waiting for the account to replenish, while we wait on paying rent and bills.. is any of this illegal? Or just extremely unethical?
Sorry to hear that Willie.
I would definitely say that’s pretty shady, although it can also be a case of poor account management as well. I’ll be honest, it’s not that rare to have issues covering payroll if business isn’t great or the people in charge just can’t manage the money properly.
Now, if the people in charge are using your tax withholdings for anything other than sending to the government on your behalf, that is indeed illegal and they can be personally held responsible, potentially facing heavy fines and even the possibility of jail time.
One thing you might want to do is to get everyone together and confront this person, but if people really need the job they may not be willing to do that. You can also try to organize everyone to engage an employment attorney and have the company investigated. Again, that too can scare people off.
Hopefully, it’s just a temporary issue and all goes better in the future!
If that happened to me, I’d start looking for another job. Not being paid on time for the work you provide is unacceptable and a valid explanation to tell an interviewer as to why you’re looking for a new job.
My husband is a 30% stockholder and his brother is 70% stockholder of a company. The brother uses the company credit cards for his personal use, approximately $50,000 per year. He pays for vacations, dinners, remodeling his house, his sons dental surgery ($2500) who lives out of state and the list goes on and on. The father past away last August and he also paid expenses from the credit card. Can his estate be taxed if IRS investigated the company? There are also monthly recurring payments from the company checkbook for paying an employee $1800 under the table, because he is on disability and can’t make over a certain amount. They also pay the sisters rent, car, insurance and cell phone, she does not work for the company. Long term care payments are also paid for the sister-in-law and now widowed step mother. I pay for my own LTC insurance. My husband did not know they had been paying the LTC for them. There is so much more, it would fill 2 pages. Another issue is, my brother-in-law takes commission on his sales at the end of each month before the customer pays its bill. They have outstanding invoices that amount to 60% that are unpaid, but he still pays himself the commission, which could be $4 – 8,000 per month. Now the company has to borrow money for operating expenses. After reading your post, none of the above is handled properly. Is a “shareholders derivative suit” the proper way to handle this situation? Any other suggestions are welcomed. We are in the state of Maryland if that matters. Thank you.
Hey Frustrated!
I’m not an attorney, so I couldn’t advise you on the type of action you should/could be taking. And I would never tell you to do it yourself, either. You should always hire a professional to handle these things for you.
That being said, I would gather all of the necessary documents–bank statements, credit card statements, and all of the accounting as well. That way you have undeniable proof should you need it, and before anyone can do anything to prevent the acquisition of these documents.
Then I would consult with an attorney, just to present your situation and get an opinion on how best to resolve this situation amicably. Perhaps confrontation and mediation will be recommended as the first step in order to avoid any drama. Maybe you’ll be instructed to simply approach your brother-in-law and present him with all of these issues and inform him of the wrongdoing.
It very well may be a case of him not having any business experience and/or knowledge of how these things should be handled.
Hey Eric, wow! Sure is nice of you to respond and reply to all our questions! Sure appreciate the time spent! I read through the comments/questions/answers to the extent that I realized there’s too much to read to apply to what I inquire about so I did a word search on this page for “Sole Proprietor” and only found one. So, I have to ask the question:
Here is a scenario:
I have a small sole proprietor business, in operation for 5 years. I perform service work, have no employees, not hiring, and plan to keep it that way for now. I have 3 accounts at the same bank, 1 Business checking, 1 Personal Checking, 1 Personal Savings. I would like to move funds from my business checking into my personal savings/checking. Purpose: for personal expenses/purchases and accrue 5% interest.
The question I have for that situation is, will there be red flags that trigger audits, investigations, questions if money is being transferred from a business account to personal savings or checking account? For example, if a person transfers randomly, $5,000 one month, $15,000 next month, $1,000 this week, $1,500 next week, etc?
Hey Al!
I try to be as accommodating as possible, so I appreciate your kind words 🙂
Since you are a sole prop, you are the business and the business is you, so technically speaking the money is all yours anyway. The IRS doesn’t see the activity in the accounts so no movement is going to “raise a red flag” in that regard.
The problem comes after the fact when people are selected for examination and the agent see things like deducting personal expenses which have no business being deducted, etc.
I always suggest having some structure because it’s easier to budget and manage the money that way, and it keeps things more organized should you need to show the proof. But, you are free to manage it as you see fit.
Hey Eric,
So I’ve been reading other posts trying to find the answer to my question but I don’t think I found one that helped specifically so I decided I’d ask you myself. I have an LLC that I use to manage a couple of rental properties. Currently I’m leasing them from a family member, meaning I make monthly payments to them (instead of a bank) but I receive the income the rentals provide. Am I allowed to:
1. Periodically write myself a personal check out of the company checking account?
2. Make my monthly payments to my family member with my business checking account?
What I have been doing is making the payments out of my personal account and then as mentioned in #1 writing myself a check to recoup those payments.
Thanks for the questions KM!
If you are a Single-Member LLC not electing S-Corp status then you can take draws from the business account to your personal to cover living expenses. I would recommend setting up regular withdrawals rather than periodic ones to establish it more like a “paycheck” than “raiding the business when you need spending money”.
Since the lease payments are part of a genuine business setup, then you should definitely be paying your family members the lease payments from the business account. It can also help protect you–because you aren’t mixing business & personal money if anything should happen in the course of business, you may be insulated from any personal liability which is a very dicey situation when you pay for business stuff personally and vice versa blurring the lines between the two.
I would definitely sit down with an attorney and make sure your current setup is proper for insulating your personal assets, as well as making sure you’re covered by the right insurance on top of that.
Hello Eric,
I have a S-Corp and I’m a 1099 consultant with no employee’s, the 1099 is listed in my name c/o my company name.
Here is where I’m struggling, Do I have the 1099 check deposited to my personal account or business account?, Currently all the funds are deposited in my business account. Also, I use my business bank payroll system to pay myself a paycheck twice a month, but at times I need funds to offset my personal lifestyle so I transfers funds from my business to my personal account when needed. Is this correct?
Option A
1099 –> business —>payroll –>direct deposit to personal–>
Option B
1099 –> personal—>business –>payroll –>direct deposit to personal–>
Thanks,
Harold
Hey Harold!
First off, as an S-Corp, you shouldn’t be receiving any 1099-MISC forms unless you’re a lawyer (or a couple other odd things). I’d suggest making sure you give all the people you work with a W-9 that is labeled as such and make sure to tell them that they don’t belong issuing you any forms so they can save that time and money.
You should be getting paid under the business name, then following path A. I’d also recommend increasing your salary if the current figure isn’t enough. You could always take a distribution but you’d have to be sure that you’ll have enough profit at the end of the year to cover what you took out or else you’ll have to pay taxes on the “excess distributions”.
If you know you’ll have a profit, then you can simply take an extra distribution check each month. It’s preferred to taking random withdrawals simply because structured transactions are easily defendable and supported upon audit/inspection.
Hi Eric, (update)
I’m the sole owner of a S-Corp with no employee’s just myself, I’m doing consulting /contract work with another company as a 1099 independent contractor, they would not do Corp to Corp. Is this correct.
Company A –> I’m contracted as a 1099 employee –> funds are deposited to my business acct–> run payroll –> direct deposit to personal account to pay me a salary.
Is this correct.
Thanks for your input you information is very valuable
Ok, no.
Since you are being paid personally and will be issued a 1099-MISC under your individual social, you will have to put that money straight into your personal account and avoid the business account altogether with it.
Any expenses you incur that are related solely to that one relationship should be paid from your personal funds as well. When it comes time to file your taxes, you will file a Schedule C for that relationship reporting those amounts while still reporting everything else on the 1120S for the S-Corp.
It’s a pain in the ass, but because the other company insists on doing things the incorrect way, and you want to take their money, there’s no other way around it. Otherwise, the IRS will receive a 1099-MISC for $X from the other company but you won’t be showing that amount on your individual return which could trigger a letter and more hassles.
Hi Eric
So as a only owner as a Corp, i receive my money for my jobs in the name of my company, than i pay myself writing a check every week for cover my personal expenses (rent, phone, groceries, internet, car payment) and the gas and tools for work I can pay with my business debit card.
And what abou distribution, every 03 months would be good?
I am asking you this because a see a lot of people pay everything in the name of the company, with a business account to pay less tax.
I do tile work, thanks for your help.
Hey Felipe!
I don’t know who the people you see doing that are, but they are absolutely wrong and if they ever get audited or sued can be in big trouble.
Distributions should be done carefully. You can only take out what you have enough basis to cover, and if you take out more, then you will have to pay more tax on it which is called “distributions in excess of basis”. So, if you take out money and then have a down rest-of-year, you may be liable for paying additional taxes next year when you file. And that is only if you are an S-Corp which isn’t clear from your comment.
On top of that, you say that you take a check, but don’t say whether or not it’s an actual payroll check with taxes withheld. That’s also very important to do if you are a shareholder-employee of as S-Corp. Your best bet is to hire an accountant who will be able to walk you through all of the necessary steps to be compliant and avoid anything which may get you in trouble with the IRS.
I have a S corporation and from time to time I have put in extra cash from my personal account to my business account and this year I wrote some checks to My son in his name, does he have to file these checks as income to him, since I wrote these checks from bussiness account. I know better now and have appointment with cpa at end of April.
Hello Brenda!
I’d advise that any money you need to give anyone other than business-related people should come directly from your personal account. As it is, you can regard the checks to your son as you own distributions, but the only business-related transactions should be paid from the business.
If you need to take money out to pay for personal matters, you should either increase your salary (and if you aren’t taking a salary, you should be as that is a big deal for S-Corp shareholder/employees) or take a distribution to yourself personally and then making the payments.
Eric, iam just starting my llc. as a consultant. I work as a consult for another consultant firm. When they pay me i would deposit the check into my business checking account. However if i need to pay personal bills. I should write myself a check to put in my personal account for personal bills. However in stead of writing a check each time. Can i just transfer money from my business to personal checking or do i need to write a actual check?
That’s a good question, Kenneth.
The short answer is it can be done either way–paper or electronic transfer. They both leave a “paper” trail as it were.
The more important issue for me is timing. I recommending doing a budget and figuring how much you’ll need personally, add a little bit for a buffer, and divide by two. Then take one half on the 15th of each month and the rest on the last day. This not only gives you a “regular income” so it feels more like you’re working a regular job but it also creates a line between you and the business showing that you’re treating the two separately and not using the business to fund your personal lifestyle and dipping in whenever you want.
Hello –
My siblings and I are shareholders of a Sub S corporation and we all own 25% of the total shares. Seems like each year one or two of the shareholders comes up short at tax time and owes money. Often, we will take a “bonus” or extra distribution to cover personal income taxes at tax time. Is this ethical, right or legal?
Thank you!
Jim
Hey James!
It is completely legal as well as ethical to do that assuming 2 things since the purpose of an S-Corp is to distribute the profits of the business to the shareholders.
As far as it being “right” that’s in the eye of the beholder. If they are coming up short, then perhaps they should be adjusting their paychecks to have extra withholdings taken out each period to try and offset the shortfall come filing season. Hopefully, you’re all taking a salary in the first place since all shareholder-employees are required to do so.
I am a S corp sole proprietor. (no employees)
I pay myself on a w-2 and taxes withheld etc.
I have profits and am learning about taking a draw- Can you tell me if I take draws, do I pay personal taxes on that? Will it be added to my gross income (placing me in a higher tax bracket on taxes)
Hey there K!
The way it works is that all profits from the S-Corp flow through to your personal 1040 on a From K-1. That amount gets taxed at your personal tax rate.
When you take a distribution, that is treated as a “tax-free” payout because you will have already paid the tax when you filed the previous year’s 1040. So, no that amount won’t get added to your gross income.
Hi Eric,
Wondering if you have any thoughts on this situation. Two partners, C-Corp, started in 2003. Had a falling out, lawsuit, etc. For all intents and purposes my partner was listed as 100% owner until 2017, when he was ordered to give me 100% of the company by Court Order.
Now I have to sign my name on the tax returns. Looking back at 10 years of bank statements, I see hundreds of transfers from business accounts directly to his brokerage account, casinos, ATM withdrawals, electronics, strip clubs, etc. Not small transactions either — all told, probably somewhere between $1mm – $2mm of personal expenses booked as business expenses. He destroyed most of the files before turning over assets in 2017, so there’s no written justification for these transactions.
Now that I know, I feel obligated to file a Form 3949A to the IRS to report the findings and draw a line in the sand. Every transaction after I took over is documented out of an abundance of caution, but I don’t want his past actions to come back and screw me.
Am I actually opening up myself to more trouble by reporting it? I would rather lose the company / assets than have his past actions blow back on me personally. Any thoughts?
Hey Kenny.
Plain and simple–speak to a tax attorney. I don’t know what the statute of limitation is legally speaking in terms of past ownership especially since this was a court-issued transfer.
And when I say speak to an attorney, actually hire one and speak to them. Don’t do like some people and go to Quora or some other site for crowdsourced info–you need someone who is going to tell you “oh, I need much more background and detail” rather than people who want to boost their own egos by paying “expert”.
Hi,
I am a bookkeeper for a small S corp business. I am constantly logging the owners personal expenses including rental cars, vacations, dinners, home goods, ect to the business. Can I get in trouble for doing this or does it fall soley on the owner of the business if there is an audit?
That’s a great question Christine!
If you are only recording the transaction into a program like QuickBooks, then you cannot get into any trouble because that’s just internal recordkeeping. Now, if you did the tax return and knowingly deducted personal expenses on the business then you can get into trouble.
At the very least I’d hope you are classifying all of the strictly personal expenses against the distributions account and not actual expenses. If you have any access to the person who does the tax return you can raise your concerns with them and make sure you’re on the same page.
I have an LLC and I am giving myself a monthly salary, plus a year-end bonus. I need a vehicle now and can’t wait for the bonus time. Am I allowed to collect the bonus early to take care of that need?
Hello Bernadette!
When you say “salary” do you mean regular pay with all of the taxes withheld? In general, LLCs don’t pay an actual salary unless they are being treated as S-Corps which is why I bring this up.
If it is an actual salary, you can give yourself a bonus at any time for any reason. It doesn’t have to be calculated in any particular way or paid on any specific date. You can even run multiple bonus payroll cycles throughout the year.
We are a fairly new S-Corp with a profit last year of $50,000. There are two shareholders, myself & my partner each 50% ownership. If we were to take distribution checks this year, is the maximum amount $50,000 between the both of us? ($25,000 each).
Also, are profits of a S-corp taxed ?
Let me answer the second one first, Dan.
The S-Corp profits are not taxed to the business, but pass through to the shareholders to be included on their individual income tax returns. You are paying the tax based on your share of the profits and your personal tax rate.
The first question isn’t as cut and dry as it might seem. There are a few variables that go into the question of “what can be distributed”. you would be best served using the link at the end of the article to schedule time with me, since there is more information needed to accurately and completely answer this particular question.
Hi,
I’m the business operations coordinator/HR/AR/AP/whatever else they have me do. The owner of this company has direct debits for personal expenses (His health insurance, car payments, insurance). He also hand writes checks to pay for personal things, and also uses the company debit card for personal purchases for anything from dinner with his family to vacation purchases and a generator for his house.
I’ve gotten him to raise his salary, but he still does this. I’m responsible for keeping our books. (Using QB online).
He’s not going to stop this, so for the time being, how do I record these personal expenses in QB? I don’t know what category to put them in, or what to do about these.
Thanks for reading Lauren!
Anything personal should be classified as “Owner Draw” or “Shareholder Distribution” depending on the business structure. So, instead of hitting an expense account, the debit will go toward their equity account instead and not be reflected in the P&L.
If you need more in-depth and/or specific assistance, please feel free to schedule some time with me: https://clarity.fm/eric-nisall
I am a one-person S Corporation in the advertising/media planning & buying field. I live in and run the business out of my partner’s home, rent-free. My corporation is being audited by the state. My home office is my ONLY office and is used exclusively & regularly for my business. The auditor is not allowing any business-related/business supply deductions (this includes things such as an electric pencil sharpener, a desk lamp, Quicken Business software, a business laptop battery, a business cell phone charger, etc.), however, because I do not pay rent and do not have a written arrangement with my partner to this effect. He says I have no valid arguments because of this. He is also disallowing any deductions for internet or TV (both ordinary and necessary for my particular business and field) or client-required product research/online software purchases for this reason. He also says that these latter costs are not reasonable costs under the IRS Research & Experimental Costs definition since they are “advertising or promotions” (which is what my business does). This seems extremely strange to me. Am I crazy?
Hello SRD.
For starters, the home office deduction isn’t available for S-Corps. In that situation, you would need to draw up an accountability arrangement to pay whoever it is that provides your rent & utilities a fair and set amount per month and then pay them from the business account. Since you don’t pay rent, and I’m assuming you don’t pay for the utilities either(?), then you have no standing to claim any household expenses as business expenses.
As for the other expenses such as office supplies and computer programs, I have no clue why those would be denied. Unless you are unable to prove that you are using them specifically for business purposes which is a very big issue when people use personal items in business.
I would suggest you hire a tax attorney or CPA who is experienced in IRS representation. That is by far your best option.
Hi Eric, the owner of an S-Corp with 20+ employees is on payroll with a high six-figure salary. In addition to that, they run about 50-60% of personal expenses through the business (clothing, vacations, groceries, home renovations, entertainment, cable bills and the list goes on), additionally they take personal distributions throughout the year, support a second and separate business at times through this company and have personal staff non-company related on the payroll. One of the top executives has a profit share agreement, what he has come to learn though based on the personal compensation of the owner is that the profits are being depleted through the years so technically he hasn’t received the actual % of profits as it’s been considerably lower by the time the end of year comes around. Is this illegal or considered misppropriation of funds in any way? Does this employee have a case or argument especially in light of the business struggling the last 2yrs, layoffs occurring and the owner continued in the same way? Any advice you can offer would be appreciated.
Hello, I have a question. I work for a very small company and my boss is the Director of Operations. The owner of the company is rarely here and doesn’t know anything about what’s going on, because my boss approves all expenses. My boss uses his personal credit card for both business and personal expenses. For example, a $5,000 trip to Alaska, flooring for his new home, blinds for his new home, granite countertops, ATV rentals while on vacation, clothes, groceries, I could go on and on….. How do I handle this situation? I don’t want to lose my job, but I also think the owner should know. It’s getting absurd.
Hello Sarah.
I’m sorry you’re in a bad working situation. It’s never fun when you realize that your boss isn’t doing things the right way. Unfortunately, I really don’t know what to tell you, other than to maybe try to get word to the owner very quietly to “drop in to check on things” related to the books.
It’s much worse if your boss is trying to use the business card for his personal expenses and write them off through the business. It’s not quite as bad if he uses the personal card for everything and then gets reimbursed for the actual business expenses, even though it is still wrong.
I am a new business owner, and I have my company structured as an LLC and Scorp. I am 100% percent owner. My question is I was reading in your comments that you recommend doing owner distributions or owner draws and top of that paying a salary on payroll? Am i understanding this correctly? Can I just do Owner draws monthly or twice a month as my salary instead of being on payroll? On top of running this business i also have my full time job.
The short answer is NO. As an S-Corp you are required to take a reasonable salary as stated by the IRS. There isn’t a firm amount as to how much but accountants have widely used the “60-40 Rule” which means 60% of compensation from salary and 40% from distributions.
You can absolutely not take it all or predominantly as distributions.
If you don’t want to be on another payroll, you can elect to revoke the S-election as of Jan 1, 2019–I always recommend using the beginning of the year for any changes due to the clean year-end break.
That’s pretty much all I can provide you with in this type of forum. If you need more personalized service, I suggest you book some time with me to dive deeper into the issue at https://clarity.fm/eric-nisall or find another professional, but it would be best to speak with someone who has the background to deal with this type of thing and not some random person on a social media group or other sites where you cannot verify the qualifications.
Hi,
I am a small business owner (LLC/S Corp) that operates the business from my home (one room turned to studio/office) and I pay myself through payroll system (I get taxed each payperiod). Currently, I am using money from my business to pay for supplies/marketing/business travel,etc. however I wondered what else could I use money from the business for? I’m wondering about things like internet, phone, partial mortgage, etc..I’m based in California (if that matters).
Thank you in advance!
Hey Gilbert!
What you’re looking for is either a course to teach you about running your business in terms of the bookkeeping which you can find at http://bookkeepingforbloggers.com or personal consulting services which I can provide if you make an appointment at https://clarity.fm/eric-nisall.
I work for a boss who has a few companies. We have one big company that pays for products. She has a tendency to take payments from client A through Company 1 and pay off her personnel loans and business loans which she is then booking against Company 2 which has another investor. She also takes money from client B and uses 80% of to pay off the work that was then suppose to be done for client A and more of her personal expenses. Falling behind on payments for client B’s projects. These are all different companies she is moving the money through.
Client A is paying for projects to be done annually and she has now drawdown for projects that aren’t starting for months but she has spent 50% of the funds need to complete the later work. What little books there are seem to be co-mingled and it appears that she is double claiming things in taxes.
She thinks all this is fine. Is it? or are there laws being broken here?
hi my husband wants to add me to his business bank account but I am not a partner nor do I work for him is this advisable for tax purposes