Should You Pay Yourself a Salary?

A family child care provider tells me she paid herself $20 a week to clean her home. She then deducted this as a business expense.

Another provider asks if she can pay herself a salary.

Neither is allowed.

If you are self-employed, you can’t pay yourself for doing work for your business.

You can’t pay yourself a salary for working for yourself.

You are entitled to all the money that you don’t spend on your business.* You can simply take money out of your checking account and use it however you want. Or, if you have a separate business checking account, you can transfer money to your personal account. When you do either of these activities, it’s called a “personal draw” in accounting lingo.

But, when you take money out of your business for your personal use, it’s not a business deduction.

Some providers are confused into thinking that they won't be eligible to receive Social Security benefits unless they pay themselves a salary. No. You pay Social Security taxes on your profit, as shown on IRS Form 1040SE, which you should be filing with your tax return each year.

* This assumes that you are operating as a sole proprietor (self-employed). If you are incorporated as an S or C corporation, then the corporation would hire you as its employee.

Tom Copeland – www.tomcopelandblog.com

Image credit: https://pix4free.org/photo/11088/salary.html