How to Legally and Strategically Pay Yourself from Your Corporation- A Comprehensive Guide

How do I pay myself from my corporation? This is a common question among entrepreneurs and business owners who have established corporations. Managing personal finances while running a business can be complex, especially when it comes to legally and ethically compensating yourself. In this article, we will explore the various methods and considerations for paying yourself from your corporation, ensuring compliance with tax laws and maintaining the financial health of your business.

Firstly, it is essential to understand the difference between salary and dividends. A salary is a regular payment you receive for your work as an employee of the corporation, while dividends are distributions of profits to shareholders. In most cases, you will be considered an employee of your corporation, and thus, you should pay yourself a salary.

Here are the steps to pay yourself from your corporation:

1.

Establish a payroll account: Set up a separate payroll account for your corporation to track salary payments. This will help you keep your personal and business finances separate.

2.

Calculate your salary: Determine an appropriate salary for yourself based on industry standards, your role within the corporation, and the financial health of the business. It is crucial to ensure that your salary is reasonable and justifiable.

3.

Withhold taxes: As an employer, you are responsible for withholding and remitting taxes from your employees’ salaries. This includes federal, state, and local income taxes, as well as Social Security and Medicare taxes. Consult with a tax professional to ensure compliance with tax laws.

4.

Make salary payments: Pay yourself the agreed-upon salary on a regular basis, such as monthly or bi-weekly. Ensure that these payments are recorded in your payroll account and reflected in your corporation’s financial statements.

5.

Consider dividends: If your corporation has generated profits, you may also choose to receive dividends. Dividends are typically paid out of the corporation’s retained earnings and are not subject to payroll taxes. However, they are subject to personal income tax. Consult with a tax professional to determine the best approach for receiving dividends.

6.

Keep accurate records: Maintain detailed records of all salary and dividend payments, as well as any related tax withholdings. This will be essential for tax preparation and financial reporting purposes.

It is important to note that paying yourself from your corporation should be done in a manner that complies with tax laws and regulations. Failing to do so could result in penalties and legal issues. Therefore, it is advisable to consult with a tax professional or accountant to ensure that you are following the correct procedures.

In conclusion, paying yourself from your corporation involves setting up a payroll account, calculating a reasonable salary, withholding taxes, and making regular salary payments. Additionally, you may consider receiving dividends if your corporation has generated profits. Always consult with a tax professional to ensure compliance with tax laws and maintain the financial health of your business.