How Do I Pay Myself From My Business?

(upbeat music) – [Toby Mathis] How do I pay
myself from my business? Jeff do you want to wack this? – [Jeff Webb] Well I mean there’s
two kinds of businesses we’re talking about. Either businesses that
we report on our 1040 like your sole proprietors
and rental businesses. Then you have your pass through businesses which is kind of the same thing. Where the income’s just
passing through you. And then we have the corporations. – [Toby] Mm-hm (Affirmative) – Let’s say that you have a
partnership or an S corporation you’re being taxed on
your share of the income whether you pay yourself out or not. – [Toby] So there’s, let me
just draw some of these up. So you have a C corp, an S corp, a partnership, and a sole proprietor. Am I missing one? – [Jeff] Rentals, but we can fill that in
with sole proprietors. – [Toby] Yeah but these
are like your big headings. And this could be an LLC
taxed as any of those. LLCs do not exist as far
as the IRS is concerned. They tell you to just select. Sole proprietor, you and
your business are the same. Because of that, you get the crud audited out of you. That’s 700% more likely
than your counterpart. And the IRS wins 94% of the time. So you’re pretty much toast because you and the business are the same. So they like to say everything
is a personal expense etc. But you if you want to get your money out. You can’t pay yourself a salary. You and the business are the
same so it’s the same bucket. You can use the same account. – [Jeff] Right. – [Toby] Same here with your partnership. There’s A few exceptions, which is if you have
a limited partnership. If there’s a general, if there’s a manager of a
LLC taxed as a partnership. You can, it’s the same bucket. In other words, whether you leave it in
there or take it out, is immaterial, there’s
no tax ramification. Then you get to your corporations. And you get a huge benefit
because you take your, you give yourself W2 wages and then there’s distributions
from that S corp. That distribution out of the S corp is a bucket that you can take money out of and put money in all the time. So you can always take money
out of an S corp as well. Because it flows down to you. All of these, I’m going to circle them. All of these are what are
considered pass through, meaning the taxes pass through to you. This guy over here, that C corp, that one is a little different. Because it is a separate tax payer, and it’s taxed by the way at 21%. That’s on its profits. And then if it pays you out anything else, you’re going to be looking at a dividend, so that’s how you pay yourself, if you’re trying to get paid for you work. Or you’re taking out profit. If you’re reimbursing
yourself for an expense, you’d literally just
write yourself a check. You submit a request
to the company and say, you know “Hey I have expenses
that I’ve incurred out here.” And the company just pays it to you, so you’re standing out here saying, “Hey pay me.” And it just pays you. If it’s compensation, “Hey I’m going to pay you for your time”, it’s W2. If it’s the profits, then it’s the dividend out of a C corp. All these others, you’re pretty easily able
to take a bunch of money out any time you want. Makes it pretty simple. – [Jeff] The other thing
where you often have in the C corps is, there’s a shareholder loan on the books. – [Toby] Yeah so let’s say
the company needs money to get started, and you loan, then it can reimburse you. It says “I heard you say
you pay 20% tax on profit.” So Chad on a C corp it pays 21% flat tax on all of it’s profits, so if a C corp makes, let’s say it’s 100,000 bucks. We’ll use the example. If Jeff made the 100,000, on top of everything else he makes, let’s say he’s in the top bracket. He’s going to be taxed federally at 37%. – [Jeff] Right. – [Toby] If a C corp
makes that same 100,000, it’s going to be taxed at 21%. If the C corp turns around and
pays Jeff whatever is left, so let’s just say 100,000, it’s at 21%, so they’ll be $79,000. 100,000 minus 21 is 79,000. That 79 and it hands it to Jeff, and says here’s a distribution
of all of our profit. Jeff has to recognize that in our cases. These are domestic US entities, as long term capital gains. Sounds weird, but the dividend rate is the
long term capital gains rate. So again assuming that Jeff
is in the highest tax bracket, he will pay 20% on that money. And since he’s in the highest tax bracket, he’s probably paying that net investment income
tax on that too right? – [Jeff] Another three point nine percent. – [Toby] Another yeah, three point eight, three point nine. What is it now? Is it three point nine? – [Jeff] I think it’s– – [Toby] I tend to blabble on that stuff, more than three. So at the end of the day when you start to add those things up, you’re going to be right
around that 37, 38 percent no matter what, so a lot of people think oh the C corp’s, the panacea for everything that ills me. But they need the money. It’s going to be the same thing as if you paid it out to yourself. Pretty much now matter how you get it out. The trick is, when you don’t need that money, you can park it in there and let it use it. – [Jeff] Right. – [Toby] And that’s
called incomes splitting. Anyway, but that’s to pay yourself out of a business. When I say W2, that means running it through payroll. You cannot run payroll
through the partner, or the sole proprietorship. That you cannot pay yourself a salary when you are, it’s tree point eight. See Bob’s helping me out. Yay Toby get’s one right. Assuming he’s right, we could both be wrong.
– No that is right. I’ll tell you later how we calculate that. – [Toby] Alright. Now you’re going to make
my head spin aren’t you? Alright so partner and sole proprietor, you cannot pay yourself a salary. S corp and a C corp, you can. Why an S corp is so much more powerful than a sole proprietorship is because you only pay the
old age death and survivors of the social security
tax on the W2 wages. You don’t pay it on the distributions, so like whenever you hear somebody say, “My S corporation saved
me $10,000 last year.” The reason that they’re saying that isn’t because the S corp
is some magical tax rate. And yeah it could be an
LLC taxes in S corp too. Remember LLC’s there’s not a tax category. LLC’s you have to pick one of these, of how to treat it. It’s going to be either partnerships, sole proprietor S corp
or C corp or disregarded, rather than sole proprietor. You can ignore it. But if you’re an S corp, then you get all this extra money and it’s not subject to old age death , and survivors medicare. Alright let’s go to the next one. You guys are asking a lot of
good questions by the way. I’m going to try not to completely, If I use my savings as a
loan to a C corp to start, how do I get my start up cost back, and is that taxable? So first off, if you give the money to your corporation, that’s paid in capital, then the corporation would write off it’s expenses. That’s not income to the corporation. So it would have a carry forward loss. If you loan the money to the corporation, and has startup expenses and wants to pay you back, it writes off the expenses, but then when it has income, it just pins it to you as
repayment of that loan. You don’t have to pay tax on that. If it’s more than $10,000 of a loan, then we have to make
sure that we’re charging a reasonable rate of interest on that loan to your corporation. Reasonable rate is federal AFR rates, which are right around
three percent, right? Right between, I just did this last year it
was less than two percent. Now it’s just under three percent. If you stick a three percentage
on there, you’re good. And someone says, “Does a C corp give you the same break as S corp on payroll?” Kind of. The difference on a C corp is it’s, when it’s paying you out profit, it has to pay tax on it first. And then you pay tax at your
long term capital gains rate, so again, it’s all a matter of, it depends. And the three rules. If you’ve ever been to a Tax wise you’ve hear me say this. There’s three rules in taxation, or anything financial. They’re real simple to remember. The first one is calculate, second one is calculate, and the third rule, little different, is calculate, right. They’re all the same. It’s always calculating because nobody knows unless you actually get your pencil out. – [Jeff] Yeah so when
you’re paying a salary out of your C corporation, you’re lowering the
corporation’s taxable income. But you’re increasing
your personal income. – [Toby] Yes. – [Jeff] So that’s why
you have to calculate. – [Toby] Yeah you’re a bucket, it’s a bucket. And if you have all the water in you, you get this huge tax hit, whereas if it has all the water in it, you’re a dry bucket, and you hate life. But if it pays, if it puts half the water in you and half the water in it, it’s amazing at how much less tax you pay. Usually shaves your tax bill by about 15%. And there’s a bunch of other
beautiful things you can do. Can your C corp be taxed as an S corp? Yes, but it’s an election that you make, and then if you go back, you have a five year
waiting period to go over to to do it again so. Somebody asked what they
could do that annually. Stop that. (light music)

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