Pay your business (and yourself) right! You are right to ask questions about the practical and legally smart ways to pay yourself as a fitness business owner.
Paying yourself from a business you own can be a pretty incredible feeling.
After all, that paycheck reflects hard work, grit, and savvy it took to bring your business to life. We’re going to discuss how to pay yourself when you’re the owner of the business.
Your Business Entity Type Matters
Business Form or Business entity is an important determining factor in many parts of the entire payroll process and will influence your decision on the way you pay yourself as a fitness business owner.
Already know your entity? Excellent. Scroll down to the next step.
If not, read this post about whether your fitness business should be an LLC, which talks about different entity types. If you haven’t decided or you’re operating in the default sole proprietor setup, schedule some time with your attorney to help explain the pros and cons of each kind, and your accountant to discuss the tax implications.
How is the money going to get into your personal bank account?
The answer to this question will depend on a few factors like your entity type, business plan, and years in operation. There are two main types of payments you should know about: owner draw and salary.
Sole proprietors and members of partnerships are free to pay themselves — or otherwise take the profits out of their businesses — whenever they’d like. The IRS views owners of LLCs, sole proprietors, and partnerships as self-employed, and as a result, they don’t need to be paid through regular wages. That’s where something called an owner’s draw can be utilized.
While this is not taxed at the time they are paid to you as the owner, this can still be a regularly scheduled payment. You should be prepared to pay taxes on them when you file your individual tax return. You can implement a system as simple as keeping the cash to pay taxes in an envelope for later, writing monthly checks to the IRS, or making quarterly estimated tax payments.
Which business entity is it best suited? Sole props, LLCs, and partnerships. If you’re an S-Corp, you’ll also have the option to take a draw in addition to your regular salary.
A Salary is a set, recurring payment that is taxed by both State and Federal Governments. This is sometimes also referred to as becoming a W-2 employee. Which business entity is it suited for? C-Corps and S-Corps.
If you are an officer of a corporation, you must be on the payroll and receive regular checks that include withholdings for Social Security, Medicare, Federal income taxes, and State income taxes.
For Limited Liability Companies (LLC) with an S-Corporation election, you must receive regular paychecks with tax, medicare and social security withholdings. As a result, the primary motivation for paying yourself this way is to avoid self-employment taxes. The company will be responsible for a portion of the tax bill, so you will want to make sure your LLC budgets for that payment each reporting period.
You also have the option of taking additional money beyond your salary in the form of a draw or dividend. Checks for draws do not withhold taxes.
Whatever payment method you choose, keep in mind that you will have to pay taxes on that amount, if not immediately, later that same tax year. Tax planning is crucial for long-term success. If you plan to use a payroll service provider, research how they handle tax payments and reporting.
How much do I pay myself as a business owner?
How much you pay yourself as a business owner isn’t just about profit & loss or cash flow of the business. It is important to examine your profit and loss statements and determine your salary cap based on net profit. But this isn’t the only factor in determining salary amount. This is because the IRS requires you to earn reasonable compensation for the type of work that you’re doing. Take a look at this SBA Income Statistics guide to help determine your “reasonable compensation.”
Decide When to get Paid
If your business has at least one employee (including yourself!), you need to think about how often you want to pay yourself. The most popular payroll schedules are weekly, twice a month, or every two weeks. Most states require that employers follow a basic calendar, detailed in this Department of Labor chart. The basic rule is that you can always pay yourself more often, but never less than your state’s particular schedule.
Let’s get this done: Pay Yourself
Almost there! Getting paid is as simple as writing a business check and depositing it into your personal bank account. You could also use direct deposit to pay yourself. Direct deposit simply means that the money is deposited into your bank account electronically.
Paying yourself for the first time isn’t just about earning money — it’s about earning money from the business you have built. Finally, if there are still things that you are not sure about because everyone’s situation is unique, you should consult with a CPA or other tax professional to examine your financial statements so you really understand which option is best for you.
This is exciting!
It’s okay to be excited about this big milestone – the point at which a business becomes profitable enough that you can be paid for your efforts. Deciding how much to pay yourself, and whether to take the money as a salary or as a draw, is part of the process. How great that you GET to make this decision.