I do both - I get a weekly paycheck and I take money as it's in there - I think my accountant calls them "distributions" I have a % of the distribution & put it in a seperate account & send that off to the IRS every quarter. It's usually less than what my accountant estimates I'm supposed to be sending it so I do get fined a little bit, but not much.

And I'll be loading up my pension plan until March 15th so that my bill will be minimal come April 15th :D

So what is the difference between taking a salary and taking a draw?

Re: Just A Reminder For Those Of You That Actually Pay Taxes :)
 

Me too. Everytime I pay quarterly taxes, I feel like I'm being robbed.

I think that since I am a corporation, I have to have employees (which is just The Bitch & myself) & thus, we have to take a salary.

It's monthly I also have a corporation and pay myself as an employee. I use a nice little company called PayCycle (http://www.paycycle.com - $39.95 to handle your payroll including direct deposit) to handle all my payments and tax documents etc, then every quarter I review it with my accountant and they tell me what I missed.

Right now we are getting everything together so we can get the year end taxes done with are due March 15th.

Seems like I am always paying taxes. Federal, State and then Unemployment taxes.

Keep in mind the type of corporation you are in as well. If you are an S-Corp then you have to pay taxes on all the money in the acct at the end of the year. I learned from my dad that the best way is to take a huge dividend at the end of the year and you pay less in taxes on that dividend. It was like 15% as opposed to 25+%.

I think, and an accountant should be consulted:

To be a corporation (in Florida and Maryland), you can file with 1 person holding all 4 offices. This is called a Close Corporation. Most states don't allow that and require two officers for the 4 positions.

Because you are a corporation doesn't mean that you have to have two employees. Board members are not necessarily employees. You might need two employees to do certain things like get group Health Insurance. The benefit to paying two employees is that your wife is also earning Social Security, although, you are paying the SelfEmployment penalty twice. This can be a great source of arguments.

If you are a Sole Proprietorship, Partnership or S Corporation, money that you take from the company that is not a payroll check is usually considered draw. The IRS doesn't really state you can do this for a corporation, but, an S corporation isn't really the same as a C Corporation. Since an S corporation flows through to your personal account, that 'draw' is profit anyhow.

Taking money as salary, then taking distributions/dividends is another way to take money out of the company. Dividends are taxed at 15% (depending on a number of factors) rather than the potential 39.6%. This of course assumes that there isn't a better tax-protected use of that money.

If you have a corporation and you don't have a Simple IRA or other qualified plan, do it. I think you can throw $10k into the Simple IRA this year plus the employer match. Paperwork needs to be filed prior to Oct 1st.

Even if you put the money in a few index funds or spdr trackers, with time on your side you should average >12% tax free.

I'm a S Corporation.

A draw sounds like what I knew as taking stock dividends which my account said is one of those things that may set off a red flag with IRS like taking a home office deduction. I'm making a whole lot more money now then the last time I asked him about it so I'm not sure if he would still say the same thing.

I have been told that it is a good thing to have my business pay some of my utilities and stuff like that since my office is one room of the house and I'm there all day at work. Best I can tell my office needs its yard cut and trimmed ever other week not to mention it needs nice all those other annoying monthly maintenance things like a cleaning service, electric, water, cable, etc.

Not sure about other states but in Florida we have to pay property taxes on the value of the business the same time of year as we have to pay all our other property taxes.

I disagree with the draw = profit part.

For example let's say your scorp made a profit of 100k in 2004 but lets say you you have a total of 150k in draws in 2004

The tax burden is on the profit the scorp made not the amount you draw out of it. You will pay taxes on the 100K not the amount you drew. If you had taken no draws you will still pay taxes on the proffit. 100K

Cheers,
BV

if a company has $150k profit, you take $50k in draw, is that $50k not part of the profit?

If at the end of the year the net balance in the bank is $0, and you took $150k out in draw, didn't that $150k flow through to your tax return as profit?

Perhaps I'm missing the part where draw != profit.

At the end of the year your balance is never 0 as there should be other monies in that account that are not profit. Such as the start up money, monies owed to creditors, etc etc.

The balance in my business account on Dec 31st showed ZERO on my papers. The balance was of course not zero i at the bank, because some stuff wasn't yet deposited or cleared or whatnot, but when I did my paperwork & saw that I had X amount of money left over, I just took a "distribution" for that exact amount & stated fresh for 2005.

I do this every year & my accountant loves me for it :)

As far as overdrawing, jsut don't do it. I take distributions once or twice a month & base it on what's int he account after I've paid my bills & whatnot. So if I have Y amount in there, I'll take out Y - Salary (so there's money in there on Pay Day) and nothing more.

I agree that's (above) good advice but sometimes overdrawing happens. maybe even just by a tiny bit.
The point I was trying to make though is that the amount you draw is not what you pay taxes on. You don't have to draw anything if you don't want and let it ride, but the taxes still need to be figured & paid and that figure is not based on what you draw out.

I guess the simple solution would be to not overdraw a large amount, especially near the end of the year :D

I think a lot of this applies to big companies with tons of employees & whatnot.


Which gives me an idea for another thread..........

That's the beauty of an S Corp.

The corporation shows 0 profit for federal taxes at year end.

All 'profit' is distributed to corporate share holders (me) via a K-1 form for tax purposes. I then pay taxes on those profits at whatever my personal tax rate is...the corporation pays none. This avoids the double taxation issue of owning/being a corporation.

The downside is I personally have to pay taxes on those corporate profits...even if I don't draw them out of the corporation. The profits only flow to me on paper in that respect.

That's not to say you can't draw out those profits, but you pay taxes on that money either way.