A sole prop is a business that’s owned by one person and managed by that same person. It’s the most popular structure folks use when they’re trying to start a company because it’s easy to set up and gives the owner total control.
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Paying myself as a sole prop
If you’re a sole prop, the IRS sees you as self-employed. As a result, you would most likely pay yourself through something called an owner’s draw. A draw allows you to take money out of your business for personal use.
Unlike employee paychecks, an owner’s draw doesn’t deduct taxes. Instead, you’ll have to pay those taxes through your personal income tax return. Keep in mind that you may also need to pay estimated taxes throughout the year before you file your return. It’s always best to chat with an accountant to make sure you’re drawing the right amount and getting those taxes in on time.
Curious about other business structures? Here’s a quick breakdown:
|Business structure||How to pay yourself||Tax Return|
|Sole proprietorship||Owner’s draw||Schedule C (Form 1040)|
|LLC with one member||Owner’s draw||Schedule C (Form 1040)|
|LLC with multiple members||Distributive share||Schedule K-1 (Form 1065)|
|Partnership||Distributive share||Schedule K-1 (Form 1065)|
|S corporation||Distributive share||Schedule K-1 (Form 1065)|
|C corporation||Dividends||Dividends income on Form 1040|
|Corporate Officer||Employee wages (if you perform more than minor services for the business)||Form W-2|