How To Pay Yourself When Self-Employed
This post may have affiliate links. Please read the Disclosure Policy for complete details.
When you’re self-employed you probably want to get paid.
So you think you should pay yourself.
At least a little somethin’, amirite?
You are the business owner after all!
I mean, you do have bills to pay.
Unless you live with family or are taken care of I guess!
But let’s stay on point here lol.
How do most people take money out of their business for personal expenses?
By writing a check and taking it to your financial institution to deposit.
Or doing a mobile deposit.
Or simply transferring money whenever they need it.
Some people I have worked with have made transfers as many as 3-4 times a week.
That is a horrible way to pay yourself no matter how you look at it, but not uncommon.
Why?
Because, just like anything else, there is a right way and a wrong way to get money out of the business to take care of personal expenses.
And just to be clear, when I say “pay yourself” I’m using that to describe the act of taking money out of your business to use for personal purposes.
The Problem With Taking Money From A Business
The money that comes into a business is meant to be used strictly for business purposes.
That means it can only be used for paying for:
- supplies
- business rent
- running payroll
- marketing costs
- your business website & all its related costs
- and anything directly related to the operation of the business.
That money is not to be used to pay for your:
- mortgage payment
- grocery delivery services
- utility bills
- car insurance premiums
- anything for your kids
- personal vacations
- or anything else that has nothing to do with the business.
If you work from home, you can take a reasonable portion of certain household expenses such as phone, power, cable television & internet, or auto-related outlays.
Sometimes, however, it is necessary to take money out of the business in order to cover some personal expenses…
The Wrong Way To Pay Yourself
Lots of people who own small businesses don’t know how to properly handle the task of taking money out of the business.
Unfortunately, many also don’t feel like they need to work with a tax accountant because they can “Google what they need to know”.
They simply make payments for their personal expenses out of the business bank account or use the business credit card for those personal expenses.
Some even head over to the ATM machine and take cash out of the business for no other reason than to have some pocket cash.
None of those methods are even close to proper.
Another thing I’ve been hearing as of late is incorrect advice for sole proprietors and single-member limited liability company (SMLLC) members, or the partnership partners to sign up with a payroll service and take a salary.
While in theory that’s a sensible option and helps to alleviate the headaches of paying self-employment tax each quarter, it’s not permitted.
A sole proprietor can have employees but they cannot be employees.
If anyone recommends that you pay yourself by putting yourself on salary as either a partner (of a traditional partnership without S Corporation status) or a sole proprietor you should ignore them and seek advice elsewhere!
The Correct Way(s) To Pay Yourself
Let’s face it, starting a business wasn’t done just to put in work and get no reward.
You want to get paid for your time and effort.
If you need to access money for personal reasons, there are three acceptable methods for doing so:
- Putting yourself on salary and taking payroll checks (if an S-Corp)
- Writing a check to yourself in the form of a distribution (again, if an S-Corp)
- Schedule regular draws (if you’re a sole prop or Single-Member LLC) instead of random withdrawals
You should always create some sort of separation between business and personal expenses, and taking either of these steps does so without drawing any unnecessary attention to the transactions.
Setting yourself up with regular payments, even if they aren’t actual “salary” checks helps not only keep the business looking legit, but it also helps people budget better because it simulates a regular salary like before they took on the entrepreneurial venture.
It also creates a paper trail, which keeps you in a good position if/when it comes to…
Getting In Trouble By Not Paying Yourself Properly
So what’s the worst thing that can happen if you don’t keep your business and personal money and expenses separate?
If you continue to treat your business as your personal piggy bank?
Bottom line is that if you are ever looked at for any reason by the IRS, a whole lot actually.
The first that that would happen is that you would have to undergo an audit, during which the burden would lie on your shoulders to prove that the expenses in question are valid business expenses.
It is your responsibility to show proof in the form of receipts or invoices that can support your claims.
If you cannot, then the fun really begins.
If you happen to be a C-Corporation, then the tax return would be recalculated with all of the expenses added back.
What makes this particularly troublesome is that C-Corps can be taxed at higher rates than individuals.
Not only that but you will be assessed interest and penalties on the unpaid portion of the newly calculated tax liability.
If the business is a partnership or an S-Corporation, the expenses will still be added back to the tax return, but it gets a little dicier from there.
Since those business formats flow through to the personal income tax return, you not only have to have your individual return recalculated but the additional income may in fact cause you to be phased out from deductions and/or credits that were originally claimed.
Let’s also keep in mind that if you have a state income tax, your state return will be affected too.
From there, your new income tax liability will be computed and you will again be charged penalties and interest on the unpaid portion of this new figure.
Additionally, you will now be on the IRS’s radar and the chance for future reviews and audits will increase.
On top of that, if you needed to raid the business accounts to support your personal lifestyle, then you will be in even greater trouble once the interest and penalties start piling on.
“How Much Should I Pay Myself?”
This is something I get asked regularly:
Hey Eric, I’m newly self-employed, can you tell me or help me to figure out how much I should pay myself?
Dozens of entrepreneurs
It’s not a bad question.
In fact, it’s a sign that they are thinking about things in the right way.
The answer, however, is difficult to come by.
It’s like most things in life, the answer is: it depends.
Everyone has a different circumstance and family situation to consider when coming up with a figure to pay yourself.
Another thing that factors into the equation is whether the business is profitable or not.
Obviously, if your business is losing money, you can’t pay yourself.
The best way I have found to answer the question of “how much should I pay myself” is to do this:
- Make a budget for your personal needs
- Figure out how much in total you will need to pay yourself in order to meet the budget
- Divide that number in half
- Pay yourself one half on the 15th of the month
- Pay yourself the 2nd half on the last day of the month
This essentially acts like a regular paycheck which makes it easier to maintain a budget.
If, however, you can’t pay yourself that amount in full, then simply pay what you can.
The point of this exercise is to make it so that you aren’t constantly dipping into your business money to pay for your personal expenses.
So now you know the answer to the question “How much should I pay myself?” should you be wondering?
Wrapping Up
Well, that’s the basics on how to pay yourself as a self-employed “boss”.
Granted, no one article can ever address everyone but this should help the majority of you.
Keep in mind 2 things:
- Nothing is written in stone–you can schedule it however and use any dollar figure you wish.
- These aren’t “rules” or “laws” just guides to help keep you out of potential trouble and make it easier to manage your business plus your money.
I urge you to adjust these guides to suit your own individual situation.
And one last thing:
A BUSINESS IS NOT YOUR PERSONAL PIGGY BANK!
Your Turn
How do you pay yourself as a self-employed person? Do you just take money out of the business account whenever you feel like it? Do you have a schedule? Do you leave the money in the business account and simply pay yourself whenever you want to bring that balance down?
my employer literally hand writes COMPANY checks to pay mortgages, car payments (4 vehicles) home taxes, personal credit card, vacations, home repairs… etc. and also collects a weekly paycheck as well
I’ve seen that in the past Dean, so it’s not anything new that they are doing nor is it illegal.
That being said…it doesn’t make it right.
Hi Eric,
I read the article about the business account not being a personal piggy bank. So does that mean a partner of an LLC SHOULDNT use the business credit card to pay for dinner out with his wife on Valentine’s Day and other special days, pay for hotel stays while on vacation, (but also worked during the week), car insurance when the company doesnt own the car, pay for a personal credit card, and pay for the kids cell phones? All of these charges go against his capital account. Is that right?
That’s correct–NOBODY should be paying for personal expenses directly from a business account of any kind.
The business credit card is used for the individual to be able to pay for business expenses without having to carry around business checks, or to pay for them personally then get reimbursed by the business itself.
All personal transactions (or those whose primary and majority purpose is personal) need to be paid out of personal funds. If the partner needs money, they would take it in the form of payroll or distributions depending on the type of business structure and tax treatment.
The bottom line is that in the case of undeniably personal expenses like V-day dinner, kids’ phones, family vacations, etc there is no reason for those to be paid by the business on behalf of the partner.
And it doesn’t matter what type of business you have set up correct LLC versus C Corp. versus S Corp. it doesn’t matter right? What about a partners capital account? Can’t they put The charges in their capital account?
No, it shouldn’t matter. BUT, there is a difference between “it shouldn’t be done” and “it’s illegal to do”.
Some accountants will allow themselves to be bullied into doing what the client says because they’re afraid to lose the money. I tell people outright that if they don’t change their ways I refuse to do business with them because I personally view it as unacceptable and unethical.
The capital accounts can be used, but then the line is being blurred between business and personal use. The proper way is to move the money from the business to the personal account and then do what you would like to do with it. That way there are clear distinctions and it doesn’t look like anyone is trying to play games.
Just ask yourself if you think Tim Cook or Bill Gates or Jeff Bezos pay for their personal expenses through their businesses.
the capital account belong to the company, they are not to be used as a piggy bank either. The capital accounts represent your interest or capital in the company, but you have to follow the Operating Agreement or By-Law on whether loans to members or shareholders can be made.
Thank you very much for your replies that eases my mind tremendously! I’m glad there’s articles like this to help those that do not have a CPA or other finance degree and are just trying to handle the books for their employer the right way.
So I’m being told from my employer that using the business credit card and coding the charge to his capital account is the same as taking a distribution. So it’s ok to use the card this way. This is an LLC filing as a C-Corp.
Like I said earlier, it’s not *illegal* to do it this way but it *shouldn’t* be done.
The partners are free to do as they wish, as they are the only ones will have to answer to the IRS should an audit or any kind of examination be done. Never mind the legal issues that may arise from commingling money when it comes to the legal protections afforded by the LLC structure that are lost when it is deemed that there is no longer a distinction between business and personal funds.
But that is all moot:
You as the employee raised the issue and were told to do the way they want…that was all you could do and just have to follow their instructions. I wouldn’t make any more of it because people can be pretty petty when you try to tall them that they are wrong.
“…d coding the charge to his capital account is the same as taking a distribution. So it’s ok to use the card this way. This is an LLC filing as a C-Corp.”
Then there’s another issue…
How is the accountant or whoever do does the C-Corp’s returns handle the ‘distributions’, IF it’s handled at all? (Is it a dividend? Compensation?)
The accountant should know that on a C-Corp anything other than salary or official loans are dividends and a form 1099-DIV needs to be issued to the receiver.
I’d recommend you schedule some time to dive deeper into this situation as this is getting more into consulting and less into “generalities”. https://clarity.fm/eric-nisall
I have work for a company that is going to use the business line of credit $700,000.00 for a down payment on a house. Is that ok?
It depends.
Technically, nothing should be paid directly from a business account for anyone’s personal expenses.
If, however the business is a sole-proprietorship then there is no legal distinction between the business and the owner so the money can be mixed, although it is better to keep it separated.
If the business is buying a house in its own name and not in the name of individuals, and the business will be collecting rent or charging fringe benefits on the W-2s of the people who use it, then that could also be a valid purchase.
It is a father son business. If they you the line of credit to help purchase the house and act as if it a business expense isn’t that wrong? And wouldn’t they need to show that as personal income.
Just being a father/son business doesn’t signify anything Mary. The business structure is what is important, as well as how this transaction is structured.
Without knowing every single detail of the way the business is set up, and how this transaction is going to be executed, as well as the intended use of the property, there is nothing I can add to what I previously stated.
I’m not in the business of taking half of the available info and giving severely faulty “advice” just to seem like an expert as so many others like to do. If you are concerned I would bring up the issue with the owners or their accountant/attorney if you are so inclined because they will have all of the necessary knowledge. I, however, am in no place to make any judgments based on what little I know if this situation.
Hi Eric. I have a complicated question.
My friend and I started a business over a year ago under an LLC that I am not attached to. When we opened the business account though, I was given 90% ownership of the account and titled “president”. Well, we’ve since had a falling out. Over a year later the business is still operating and I am still attached to the business account.
Legally speaking, Do I myself have any jurisdiction to the money? If I chose to close the account out as 90% owner, what legal trouble am I looking at?
I’m not even going to touch that Stephen, because it’s a legal matter and I’m not a lawyer.
Not to sound harsh, but you need to be speaking to a qualified attorney, not looking on blogs or doing searches for the answers to that situation. When you’re in that kind of position, you don’t want to rely on anything except for someone who is qualified in contract/business law who will have access to ALL of the information involved and knows what you may be leaving out or forgetting in relaying the info!
What is considered a distribution? Is it a bonus? Can I write a check to us for the same amount every month in addition to the monthly salary?
Hello Stacey!
A distribution is actually a “Distribution of Profits” and it’s available to S-Corporation shareholders. It’s not a bonus, but rather a way to take out the profits of the business that were taxed to the shareholders. Since the shareholders already paid taxes on these profits, the money is taken out tax-free as a straight check or funds transfer.
You can set up the payment of distributions in any way you wish: monthly, quarterly, lump-sum. It doesn’t really matter how you do it, but yes, it is most definitely in addition to any salary payments.
can the owner of an LLC write a check to his wife from his business to be deposited into her personal account to cover the cost of their monthly mortgage? Then code is on the books as a building expense? Also change the name on the check in the register to read the name of the bank instead of her to make it look like a company expense. And she never claims it as income. is this even legal?
Hello Kelly, thanks for reading!
If the owner was coding the check to his Draw account, then it would be perfectly legit. Since he is entitled to take money out of the business, this is the best way to approach it, although, I would still say that a better way would be to write HIMSELF the check and then pay the mortgage.
BUT, because he wants to write of the personal mortgage as a business expense–that’s against the rules. I wouldn’t go as far to say that it’s illegal, but it’s closer to fraud than not.
It’s one thing to properly take money out of a business for personal expenses. It’s a completely other issue entirely to claim personal living expenses as business deductions. Under audit or even the general examination, that would get questioned, and the deduction would get thrown out, leading to the original tax being owed plus interest and penalties. Plus, people caught doing this are also subject to closer watch, and a higher chance of future examinations or audits!
Hello Kelly, thanks for reading!
If the owner was coding the check to his Draw account, then it would be perfectly legit. Since he is entitled to take money out of the business, this is the best way to approach it, although, I would still say that a better way would be to write HIMSELF the check and then pay the mortgage.
BUT, because he wants to write of the personal mortgage as a business expense–that’s against the rules. I wouldn’t go as far to say that it’s illegal, but it’s closer to fraud than not. Regardless of how the payment is structured, personal mortgages simply cannot be treated as business expenses.
It’s one thing to properly take money out of a business for personal expenses. It’s a completely other issue entirely to claim personal living expenses as business deductions. Under audit or even the general examination, that would get questioned, and the deduction would get thrown out, leading to the original tax being owed plus interest and penalties. Plus, people caught doing this are also subject to closer watch, and a higher chance of future examinations or audits!
Hello Eric, just curious I have a C Corp if write myself a check from the business to help off set the cost of health insurance, and not use the cost as a business expense and pay any taxes owed . Is this ok, will there be any personal liability on my part for the distribution? Thanks
Hey Lester, thanks for reading!
For general issues, when dealing with a C-Corp the rule is dividends not distributions. And since dividends are taxable to the individual receiving them, it may not make sense to take them unless you know you’ll be falling into the 0% long-term capital gain and qualified dividend tax brackets. But if you want to pay the taxes on them, that’s fine! Because the dividend comes from profits & retained earnings, it’s never going to be a deduction anyway.
If you don’t have enough profits/retained earnings to issue a dividend, then you can consider taking a distribution against your basis in the company. Again, that is going to only affect your equity, and won’t be a deduction reducing net income. The same goes if you had a legal loan to the business. Either of those will also allow you to do what you are thinking of in general terms.
It gets even trickier if you’re talking about health insurance, because:
1. The policy needs to be structured in a specific way, and
2. It should be done via the W-2 assuming you’re an employee/shareholder and not just an investor/shareholder
This is something you really should be speaking to your own accountant or payroll/insurance person about because of the rules that are different based on the number of employees, the types of policies you have and your position in the company. There are just too many variables to make a blanket statement beyond the ways of taking money out of the business I outlined.
Even if you don’t want to use it as a deduction, you still need to follow certain rules when it comes to things like health insurance for employees/ownership. And, like many things regarding accounting & taxes, you and/or your accountant may be willing to push the boundaries where someone else might not be as aggressive and stick to the letter of the law.
Good luck!
As the famous adage goes that we must keep our personal and professional lives separated, the similar rule also applies to our finances too. The 5 reasons you have given are pretty strong and are sufficient to convince the entrepreneurs to follow it. Thanks for this post!
I have a small bookkeeping practice and I’m struggling with one of my clients. They run their entire lives through their business and while my “job” is to record the transactions as they are given to me, I am struggling and think I need to drop them. I even made their tax prep CPA aware of several situations that are incorrect and he made no adjustments before filing their business tax return. Do I have an liability if/when they get audited?
Hey Lisa!
To be honest, I’m not an attorney so speaking to your culpability in the legal sense isn’t my thing, and I would suggest you checking with someone qualified.
However, if you are keeping records and documenting your communication with both the client and their CPA, I would tend to think that you would be in the clear. Looking at it logically (which is obviously not always how the law works unfortunately) you are raising the concern with the client, and then telling the CPA that what they are receiving isn’t 100% accurate for accounting/tax purposes. If the CPA then proceeds with the knowledge of specific areas which should be adjusted, and they sign off on the return, then I’d like to think you are absolved of any liability.
All that being said, I would strongly suggest you move forward on dropping them considering the fact that they are doing things incorrectly, but more importantly causing you more trouble than they are worth (I’m assuming).
If I have an LLC and I have my wife as a partner, can I take money out to pay a personal expense by having my wife write me a check from this account? Is this legal as long as I don’t claim it as a business expense?
If you are both partners and both signers on the account then you can always just write the check yourself Dennis, there isn’t anything wrong with that.
As far as it being to pay for a personal expense, as long as you have basis (either from capital or profits) then you can take a distribution for it. However, the point of the business bank account/credit card is for business transactions and you should be trying to schedule out your distributions in regular increments to cover your personal needs rather than dipping in whenever the need arises (just making a blanket statement here, not accusing you).
Not booking the withdrawal as an expense is the correct way to classify it as you state as well.
Hey Eric, so basically I bought a handgun with a c Corp card and it costs 500 dollars. Do you think I will be penalized with interest? If so how much would it be?
If it was a legit expense ie: to protect your business then it’s fine.
If not, and the business gets audited or examined in any way and the agent asks about it then you certainly will have that expense disallowed with interest and penalties added on top of the tax.
The amount of the extra charges is hard to calculate without knowing dates and rates and all of the variables, but your real worry is something else. If you are found to be misappropriating business funds in any way, you will be look at even harder and more often going forward.
The company that I work for is owned by a husband and wife team that take a salary AND run their personal (gas, groceries, VERY expensive vacations) expenses through the company. I happen to know that they are struggling with cash for the business and are making budget cuts and planning to make even bigger cuts claiming the need is that sales have been low. Even though sales have been low, and cuts may be necessary, they have not changed their personal spending habits at all. In fact, they are planning an expensive ski vacation for their family in midst of these cut backs that are…yep…being funded by the company credit cards.
I know the easiest thing would be just to find another job. But it makes me so mad that they would dare talk about cutting back on people, and not their own shopping habits.
I’m a partner in an LLC, I have 25%, spouse has 25%, friend has 35% and the 4th has 15%. I operate the business on a daily basis. The 3 others are silent partners. Am I supposed to notify them if I write a distribution check to myself in addition to my automatic monthly distribution? What if I then wrote a personal check to cover that additional check?
Hey Casey, thanks for reading!
Honestly, I would check with your accountant/attorney. In an arrangement like the one you lay out, there are probably specific ways of paying out distributions in the operating records. For example, capital contributed doesn’t always correlate to distribution percentage. It’s all spelled out in the operating agreement.
Sorry to be non-committal on an answer, but there just isn’t enough info to come up with one.
I’m pulling 80k from my LLC as a down payment for my home where my new business head quarters will be located. Can that be written off?
No Carlos, you cannot expense any part of your personal residence purchase.
What you can do is take the home office deduction if you qualify going forward, and depreciate an external unit (ie: shed used as an office or specially-built detached unit) but that is the extent of it.
The $80,000 needs to be classified as a draw (or distribution if you are taxed as an S-Corp and have the basis to take it).
I have a relative whose asked me to look at his books for him. He does not manage his business money well at all. Its an S Corp HVAC repair company which he does not pay himself taxable paychecks but rather continuous dividend distributions. He once had employees in previous years in which he did pay himself and payroll taxes (50% payroll and 50% dividends in a year) but is now on his own. On top of this, many personal expenses are on his business bank statements such as personal vehicle expenses, vacation expenses, many fast food transactions and so many other transactions that are not business related. The scary part is we’re just completing the 2017 year and he litetally paid himself NO true payroll checks with any payroll taxes paid, just weekly dividends in addition to the countless personal expenses.
If by some miracle he were to have a religious experience and realize the wrongs hes done, what are his best amd worst case scenarios?
Hey there Anon, thanks for reading!
Unfortunately, the circumstances can be pretty bad if no action is taken this year. As an S-Corp, the IRS is going to look at the Ordinary Business Income on the tax return (1120-S). If it’s positive, the next place that will be inspected is the line for Compensation of Officers. If there isn’t anything on that line, and there are distributions, the return has a good chance of being called for inspection. The IRS can take a few years to even take any action including asking to inspect a return, so that means the possibility of years of compounding interest and penalties depending on how long it takes and if it even happens at all.
What will likely happen next is the entire return will be examined, and the deductions for the personal expenses will be thrown out, thereby increasing profits (unless the personal stuff was just booked as distributions which doesn’t impact profits). Then the distributions will be reclassified based on the incomes and your relative’s position/duties.
All of the payroll tax returns will be created and interest/penalties will be added to the regular taxes due. On top of that, state unemployment taxes will be due as well including any interest/penalties due there (it doesn’t matter if your relative is in a no-tax state, all states have unemployment tax responsibility based on wages paid).
Once all of the adjustments are made, the new info will be passed through to the 1040 (since an S-Corp doesn’t pay its own taxes and simply passes through to the individual to pay). Any additional income taxes that this creates will also be assessed penalties/interest as well.
What CAN be done, however, is to make a large paycheck before the end of the year, filing all of the correct payroll tax returns, and paying all of the liabilities timely. That and going back and filing all of the late zero-dollar payroll tax returns (because even if no payroll was done, the returns are still required to be filed).
Honestly, even the old 50/50 ratio was too low. A ratio of AT LEAST 60/40 salary/distribution is recommended by most accountants to be in the safe zone. That way, if ever asked about, the answer is “I’m clearly taking a majority of my income as salary and paying the FICA taxes”. It’s important because distributions are only taxed on the federal level and trying to only take income in that method is considered to be tax fraud by trying to evade paying the FICA taxes.
I would seriously consider having them hire a local CPA who will know how to handle a person in that position. Good luck and I hope they see the light sooner than later!
Thanks for your quick response. I truly appreciate it.
Im in a similar sitiation. Owner uses bank card for a lot of personal eats, trips, vacations, home repairs, eat outs, knowing she cant make payroll the following week. She seems to not care anymore….im on the checking and don’t want to be….dont want to ne held liable. In my mind, she gas quit caring and so have i. I want out…..will i be implicated since i was paying the bills…..withwhat ever money i had a available and she wasnt spending?
Hello Mary.
I’m not an attorney so I cannot speak to your liability as a signer on the account. You would have to present this to lawyer to have a definite answer.
Sorry 🙁
Hi Anon,
I am getting my ducks in a row to open an online fabric store. I am getting my garage in order to store the inventory and shipping table and supplies. I plan on applying for a small business loan to purchase my inventory. As luck would have it, my garage ceiling (Sheetrock) collapsed. I received a quote to repair it ($2800). Can this unexpected expense be paid for using my business loan since this is the business space?
Hello Julie.
While you plan on using the space for your business, it is still part of your home. That means you will have to go through your insurance or out of your own pocket to pay for the repairs.
If this was a separate unit, like a shed, that was built specifically to serve as business space, then you would be able to use the business loan to pay for it–assuming you are getting a loan that has no constraints meaning it can be used for anything not just inventory.
But, the garage is first and foremost a part of the house and not business property.
I’m a sole proprietor, no employees, licensed contractor that works freelance with no guaranteed income, my DBA is my name, my state contractors license is my name, and I have a business savings account and a personal checking account, no business credit card or checking account. I deposit checks made to the business (my name plus Electric) into the business savings account and then move the money as I need to my personal checking to pay for everything for business and personal. I don’t see any other way of doing things
Hey there Kenneth, thanks for commenting!
My question to you is: why would you have a business savings account and not a checking?You had the right idea by having a separate account where all of the money from the business would go.
So here is how the other way to do things would go:
Instead of the business savings, you have a business checking. You continue your current practice of using that account to collect all customer payments. BUT instead of moving everything to your personal account, you simply move over enough to cover your personal expenses. Then you keep the rest in the business account and pay the business liabilities from there.
Why?
For starters it indicates a clear distinction between personal and business transactions should you get audited or examined by the IRS. Second, should you need a loan you will be able to show the lender separate statements and not one big mess of commingled money. Lastly, you will know that everything running through the business account is only business so it makes your bookkeeping easier and less time consuming plus it ensures that you don’t miss any deductible transactions.
There you go–another way of doing things without very much effort or cost but one which will simplify things for you tremendously.
Hope this helps!
My husband owns a company with a partner who manages it with a salary. The partner recently hired his wife to manage the financials from their home without consulting my husband. She isn’t a professional and we are upset and would like to know what you think. We do have access to the business checking account but she will be checking receipts to see if charges are legit. What do we need to do to make sure all is well.
Honestly, I would be at bit concerned any time a major decision such as that is made unilaterally.
That being said, since you have complete access to the accounts, I wouldn’t be so worried as you will be able to see all of the activity online and be able to check that nothing funky is going on.
If I was your husband, I would sit the partner down and discuss this like adults (as opposed to storming in and screaming from the jump). I’d mention that I didn’t particularly are for the fact that made these decisions without consulting him first since it affects the company as a whole. And it’s a little odd that the financials are being kept at their home rather than in the office and it’s more appropriate for that to be location of all business documents.
The important thing is to keep thing neutral and not make it seem like the partner or his wife is being “attacked”. Rather it needs to approached as a simple discussion the same way any other business decision would be.
Good luck, and hopefully it works out for everyone!
Thank you so much for your response and we completely agree.
We could use some advice on another issue… We bought in to the company 2 1/2 years ago when the company wasn’t doing well. Partner and wife then decided to go to two conventions both in exotic places. We know they didn’t do this before we bought in and want to know if we can make them pay us back for financing 1/2 of it. They did ask us to go and we politely declined mainly because the company was just getting back on its feet and we felt it irresponsible. OK I will be honest here, when I heard they were going a second time I completely lost it. Our company is doing better but not good enough for trips like that so if you could please let us know how to handle this we would appreciate it. They are not going on a third trip but partner said we couldn’t afford it, duh!!!
Honestly, that’s not something I can/should be advising on.
If the trip has legitimate business purposes, then it could be viewed as a needed expense to try to build relationships, learn new things, get valuable industry insight, etc. I’ve seen plenty of real conventions held in resort towns or tropical locales simply to enhance the overall experience.
If you are having interpersonal issues with the other half of ownership, which includes ideological differences on how the business should be run, there really isn’t any way to sugarcoat it…you probably need to remove yourselves from the situation.
I would recommend you speak to an attorney about what your options are for dissolving the partnership and getting out.
Quick history…4 shareholders of a S Corp, 10%, 10%, 10%, 70%. One of the 10% bought the 70% through personal note from owner of 70%. Refinanced house for down payment. Now there is 10%, 10%, and 80%. All shareholders have always taken a reasonable salary and then distributions from the profits and payed for business notes out of personal $. New owner now is saying distributions will come out after mortgage used for down payment and personal business note is paid. Is that legal for a majority shareholder to do in an S Corp?
Hey Wyn!
I’m going to be honest, you need to speak to your attorney or whoever is responsible for drafting and/or maintaining operating agreements and corporate policies.
It doesn’t always matter what the ownership percentages for dictating policies. There are some businesses where there are partners simply for the sake of infusing capital where those shareholders have zero input. If other terms are agreed to and set forth in the corporate charter or some subsequent operating agreement.
It’s always best to go to the source–or at least someone who you can turn to who is knowledgeable and impartial on the matters. With that will come the need to give them access to all corporate info, and I simply do not have that. This is especially the case when there is a subsequent purchase agreement between two of the original shareholders which may lay out its own terms.
I hope this info points you in the right direction and wish you good luck with this!
What changes if this is a non-profit? (not 501-c3).
Hey there Curious!
There are not many operating differences between for-profit and non-profit businesses. The main difference is the intent–non-profits don’t operate for the intention to profit but rather to be a public-good business. Since you mention the 501(c)(3) designation let me state that that is simply a tax-exempt status with the IRS, and non-profits can still operate without that specific designation.
With that being said, the same basic rules apply to all businesses. Regardless of the intent, no one should be using the business to fund their personal life.
In my personal opinion, it’s even worse when the people who run businesses that are supposed to “give back” break this rule and use the business money for personal use. The biggest reason is that most people who donate or buy from these businesses do so on the sole basis of believing that the money is going to be used to help the community. So when someone takes advantage and misappropriates those types of funds, to me that is a special type of low.
I went in 1/3 with my nephew to open a business. Found out my nephew has been using the business account to pay things like his mortgage, loans and groceries. He hasn’t given me my share of profit in three years. What can I do about the embezzlement? The business and bank account are under his name only.
Sorry to hear that.
The sad truth is that your only recourse is probably to engage an attorney. Hopefully, you have everything documented showing your investment and the profit sharing agreement. Otherwise, you may have trouble getting what you feel you’re entitled to.
I love the simplicity of this article and also Business is Not Your Personal Piggy Bank.
We are in the last legs of gathering evidence to prove our partner is in breach of his fiduciary responsibility, I’ve been reading everything I can from numerous websites and we are in the exact situation as you describe in these articles. Every thing you say can happen is happening by our partner to us. Hes the managing partner and If i was looking for an attorney, I would contact you. I cant wait for my husband to read your articles, when he wakes up. Hes very passive and I need him to put our partner on notice the next day or so that we want out non-contested end of our partnership. im going to read more thank you
Thanks, but I’m the last person you’d want to hire since I’m not a lawyer. In fact, nowhere do I ever claim to be or give out legal advice.
However, I am glad you got some value from these types of articles and were able to use them to get a better picture of what was going on in your own business!
I cannot emphasize enough how important it is to have a separate bank account. I’m a blogger/health coach and my tax professional filed a schedule C with my taxes and it triggered an IRS audit. Even though I had receipts for everything I claimed and the expenses were obviously business related (FB ads, Aweber, Leadpages, etc) my appeal was denied (I appealed 2x then gave up) and I had to pay the IRS 🙁 Now I’m having to get a DBA and business license in order to even open a business bank account and set things up in a more formal way.
Thanks for reading Gail!
Sorry you had to go through that hassle with the IRS. I’ve got to be honest, I’ve never heard of the IRS denying legit business expenses solely on the basis of not using separate accounts.
I’d actually recommend speaking with a tax attorney to see what can be done about that., and if the tax preparer did something wrong to cause your issues, they should be paying for any penalties and/or interest you incurred plus your fees to get it straightened out.
But yeah, it’s always preferable to do all of that right from the start because of the headaches of having to redo all of it mid-stream. Good luck moving forward!
I am a LLC – sole pro.
I use my business account to pay for everything.
mortage, supplies, electric, etc.
Are you suggesting I pay myself monthly from my business account into a personal account and pay from there? would i have to file two separate taxes at the end?
and if money goes into business account not earned by work do i have to add that into income. example transferring money from personal saving to pay taxes and into SEP.
thanks
Well, Shakti those questions are the exact reason you need to keep things separate.
First, if you have everything separate you don’t have to worry about whether or not to include all the money going in with income. All money going into the business account will be your income and taxable.
Then you will move the money to your personal account where you pay all of your living expenses.
You only file one tax return with the IRS as a Single-Member LLC (but you may have to file a separate return with your state).
Hopefully, you only just set this up in 2018 because if you did it further back then it sounds like you may need to get someone to check it out to ensure you didn’t do anything wrong.
Good luck!
Eric,
I’m the controller for an S Corp. with three owners. We have set-up a draw account for each owner and each take a normal monthly draw. Recently, one owner went to an attorney to have him write a letter to one of the other owners addressing the sale of shares of stock. What is the legitimately way of coding the attorney fee? Should I code it as a legal expense to the company or as part of the draw to the owner who retained the lawyer?
Hey Troy!
If the one shareholder paid the attorney for his own interests, then it is not a company expense, but a personal one which needs to go against their own distribution account. Because the individuals own the shares and the communication was between just two of them regarding that personal holding, it is a personal matter. If/when an attorney is engaged to redraft the operating agreement or anything pertaining to the business itself, that can be deducted as legal expenses.
Speaking of distributions, I’m hoping you meant that they each get a distribution in addition to regular payroll checks each month!
Hey I work at a place where we believe the owner is using our payroll account to pay for his lifestyle. When our paychecks come out once a week there isn’t enough money for us to cash or deposit them when we get them. We end up waiting for the account to replenish, while we wait on paying rent and bills.. is any of this illegal? Or just extremely unethical?
Sorry to hear that Willie.
I would definitely say that’s pretty shady, although it can also be a case of poor account management as well. I’ll be honest, it’s not that rare to have issues covering payroll if business isn’t great or the people in charge just can’t manage the money properly.
Now, if the people in charge are using your tax withholdings for anything other than sending to the government on your behalf, that is indeed illegal and they can be personally held responsible, potentially facing heavy fines and even the possibility of jail time.
One thing you might want to do is to get everyone together and confront this person, but if people really need the job they may not be willing to do that. You can also try to organize everyone to engage an employment attorney and have the company investigated. Again, that too can scare people off.
Hopefully, it’s just a temporary issue and all goes better in the future!
If that happened to me, I’d start looking for another job. Not being paid on time for the work you provide is unacceptable and a valid explanation to tell an interviewer as to why you’re looking for a new job.
My husband is a 30% stockholder and his brother is 70% stockholder of a company. The brother uses the company credit cards for his personal use, approximately $50,000 per year. He pays for vacations, dinners, remodeling his house, his sons dental surgery ($2500) who lives out of state and the list goes on and on. The father past away last August and he also paid expenses from the credit card. Can his estate be taxed if IRS investigated the company? There are also monthly recurring payments from the company checkbook for paying an employee $1800 under the table, because he is on disability and can’t make over a certain amount. They also pay the sisters rent, car, insurance and cell phone, she does not work for the company. Long term care payments are also paid for the sister-in-law and now widowed step mother. I pay for my own LTC insurance. My husband did not know they had been paying the LTC for them. There is so much more, it would fill 2 pages. Another issue is, my brother-in-law takes commission on his sales at the end of each month before the customer pays its bill. They have outstanding invoices that amount to 60% that are unpaid, but he still pays himself the commission, which could be $4 – 8,000 per month. Now the company has to borrow money for operating expenses. After reading your post, none of the above is handled properly. Is a “shareholders derivative suit” the proper way to handle this situation? Any other suggestions are welcomed. We are in the state of Maryland if that matters. Thank you.
Hey Frustrated!
I’m not an attorney, so I couldn’t advise you on the type of action you should/could be taking. And I would never tell you to do it yourself, either. You should always hire a professional to handle these things for you.
That being said, I would gather all of the necessary documents–bank statements, credit card statements, and all of the accounting as well. That way you have undeniable proof should you need it, and before anyone can do anything to prevent the acquisition of these documents.
Then I would consult with an attorney, just to present your situation and get an opinion on how best to resolve this situation amicably. Perhaps confrontation and mediation will be recommended as the first step in order to avoid any drama. Maybe you’ll be instructed to simply approach your brother-in-law and present him with all of these issues and inform him of the wrongdoing.
It very well may be a case of him not having any business experience and/or knowledge of how these things should be handled.
Hey Eric, wow! Sure is nice of you to respond and reply to all our questions! Sure appreciate the time spent! I read through the comments/questions/answers to the extent that I realized there’s too much to read to apply to what I inquire about so I did a word search on this page for “Sole Proprietor” and only found one. So, I have to ask the question:
Here is a scenario:
I have a small sole proprietor business, in operation for 5 years. I perform service work, have no employees, not hiring, and plan to keep it that way for now. I have 3 accounts at the same bank, 1 Business checking, 1 Personal Checking, 1 Personal Savings. I would like to move funds from my business checking into my personal savings/checking. Purpose: for personal expenses/purchases and accrue 5% interest.
The question I have for that situation is, will there be red flags that trigger audits, investigations, questions if money is being transferred from a business account to personal savings or checking account? For example, if a person transfers randomly, $5,000 one month, $15,000 next month, $1,000 this week, $1,500 next week, etc?
Hey Al!
I try to be as accommodating as possible, so I appreciate your kind words 🙂
Since you are a sole prop, you are the business and the business is you, so technically speaking the money is all yours anyway. The IRS doesn’t see the activity in the accounts so no movement is going to “raise a red flag” in that regard.
The problem comes after the fact when people are selected for examination and the agent see things like deducting personal expenses which have no business being deducted, etc.
I always suggest having some structure because it’s easier to budget and manage the money that way, and it keeps things more organized should you need to show the proof. But, you are free to manage it as you see fit.
Hey Eric,
So I’ve been reading other posts trying to find the answer to my question but I don’t think I found one that helped specifically so I decided I’d ask you myself. I have an LLC that I use to manage a couple of rental properties. Currently I’m leasing them from a family member, meaning I make monthly payments to them (instead of a bank) but I receive the income the rentals provide. Am I allowed to:
1. Periodically write myself a personal check out of the company checking account?
2. Make my monthly payments to my family member with my business checking account?
What I have been doing is making the payments out of my personal account and then as mentioned in #1 writing myself a check to recoup those payments.
Thanks for the questions KM!
If you are a Single-Member LLC not electing S-Corp status then you can take draws from the business account to your personal to cover living expenses. I would recommend setting up regular withdrawals rather than periodic ones to establish it more like a “paycheck” than “raiding the business when you need spending money”.
Since the lease payments are part of a genuine business setup, then you should definitely be paying your family members the lease payments from the business account. It can also help protect you–because you aren’t mixing business & personal money if anything should happen in the course of business, you may be insulated from any personal liability which is a very dicey situation when you pay for business stuff personally and vice versa blurring the lines between the two.
I would definitely sit down with an attorney and make sure your current setup is proper for insulating your personal assets, as well as making sure you’re covered by the right insurance on top of that.
Hello Eric,
I have a S-Corp and I’m a 1099 consultant with no employee’s, the 1099 is listed in my name c/o my company name.
Here is where I’m struggling, Do I have the 1099 check deposited to my personal account or business account?, Currently all the funds are deposited in my business account. Also, I use my business bank payroll system to pay myself a paycheck twice a month, but at times I need funds to offset my personal lifestyle so I transfers funds from my business to my personal account when needed. Is this correct?
Option A
1099 –> business —>payroll –>direct deposit to personal–>
Option B
1099 –> personal—>business –>payroll –>direct deposit to personal–>
Thanks,
Harold
Hey Harold!
First off, as an S-Corp, you shouldn’t be receiving any 1099-MISC forms unless you’re a lawyer (or a couple other odd things). I’d suggest making sure you give all the people you work with a W-9 that is labeled as such and make sure to tell them that they don’t belong issuing you any forms so they can save that time and money.
You should be getting paid under the business name, then following path A. I’d also recommend increasing your salary if the current figure isn’t enough. You could always take a distribution but you’d have to be sure that you’ll have enough profit at the end of the year to cover what you took out or else you’ll have to pay taxes on the “excess distributions”.
If you know you’ll have a profit, then you can simply take an extra distribution check each month. It’s preferred to taking random withdrawals simply because structured transactions are easily defendable and supported upon audit/inspection.
Hi Eric, (update)
I’m the sole owner of a S-Corp with no employee’s just myself, I’m doing consulting /contract work with another company as a 1099 independent contractor, they would not do Corp to Corp. Is this correct.
Company A –> I’m contracted as a 1099 employee –> funds are deposited to my business acct–> run payroll –> direct deposit to personal account to pay me a salary.
Is this correct.
Thanks for your input you information is very valuable
Ok, no.
Since you are being paid personally and will be issued a 1099-MISC under your individual social, you will have to put that money straight into your personal account and avoid the business account altogether with it.
Any expenses you incur that are related solely to that one relationship should be paid from your personal funds as well. When it comes time to file your taxes, you will file a Schedule C for that relationship reporting those amounts while still reporting everything else on the 1120S for the S-Corp.
It’s a pain in the ass, but because the other company insists on doing things the incorrect way, and you want to take their money, there’s no other way around it. Otherwise, the IRS will receive a 1099-MISC for $X from the other company but you won’t be showing that amount on your individual return which could trigger a letter and more hassles.
Hi Eric
So as a only owner as a Corp, i receive my money for my jobs in the name of my company, than i pay myself writing a check every week for cover my personal expenses (rent, phone, groceries, internet, car payment) and the gas and tools for work I can pay with my business debit card.
And what abou distribution, every 03 months would be good?
I am asking you this because a see a lot of people pay everything in the name of the company, with a business account to pay less tax.
I do tile work, thanks for your help.
Hey Felipe!
I don’t know who the people you see doing that are, but they are absolutely wrong and if they ever get audited or sued can be in big trouble.
Distributions should be done carefully. You can only take out what you have enough basis to cover, and if you take out more, then you will have to pay more tax on it which is called “distributions in excess of basis”. So, if you take out money and then have a down rest-of-year, you may be liable for paying additional taxes next year when you file. And that is only if you are an S-Corp which isn’t clear from your comment.
On top of that, you say that you take a check, but don’t say whether or not it’s an actual payroll check with taxes withheld. That’s also very important to do if you are a shareholder-employee of as S-Corp. Your best bet is to hire an accountant who will be able to walk you through all of the necessary steps to be compliant and avoid anything which may get you in trouble with the IRS.
I have a S corporation and from time to time I have put in extra cash from my personal account to my business account and this year I wrote some checks to My son in his name, does he have to file these checks as income to him, since I wrote these checks from bussiness account. I know better now and have appointment with cpa at end of April.
Hello Brenda!
I’d advise that any money you need to give anyone other than business-related people should come directly from your personal account. As it is, you can regard the checks to your son as you own distributions, but the only business-related transactions should be paid from the business.
If you need to take money out to pay for personal matters, you should either increase your salary (and if you aren’t taking a salary, you should be as that is a big deal for S-Corp shareholder/employees) or take a distribution to yourself personally and then making the payments.
Eric, iam just starting my llc. as a consultant. I work as a consult for another consultant firm. When they pay me i would deposit the check into my business checking account. However if i need to pay personal bills. I should write myself a check to put in my personal account for personal bills. However in stead of writing a check each time. Can i just transfer money from my business to personal checking or do i need to write a actual check?
That’s a good question, Kenneth.
The short answer is it can be done either way–paper or electronic transfer. They both leave a “paper” trail as it were.
The more important issue for me is timing. I recommending doing a budget and figuring how much you’ll need personally, add a little bit for a buffer, and divide by two. Then take one half on the 15th of each month and the rest on the last day. This not only gives you a “regular income” so it feels more like you’re working a regular job but it also creates a line between you and the business showing that you’re treating the two separately and not using the business to fund your personal lifestyle and dipping in whenever you want.
Hello –
My siblings and I are shareholders of a Sub S corporation and we all own 25% of the total shares. Seems like each year one or two of the shareholders comes up short at tax time and owes money. Often, we will take a “bonus” or extra distribution to cover personal income taxes at tax time. Is this ethical, right or legal?
Thank you!
Jim
Hey James!
It is completely legal as well as ethical to do that assuming 2 things since the purpose of an S-Corp is to distribute the profits of the business to the shareholders.
As far as it being “right” that’s in the eye of the beholder. If they are coming up short, then perhaps they should be adjusting their paychecks to have extra withholdings taken out each period to try and offset the shortfall come filing season. Hopefully, you’re all taking a salary in the first place since all shareholder-employees are required to do so.
I am a S corp sole proprietor. (no employees)
I pay myself on a w-2 and taxes withheld etc.
I have profits and am learning about taking a draw- Can you tell me if I take draws, do I pay personal taxes on that? Will it be added to my gross income (placing me in a higher tax bracket on taxes)
Hey there K!
The way it works is that all profits from the S-Corp flow through to your personal 1040 on a From K-1. That amount gets taxed at your personal tax rate.
When you take a distribution, that is treated as a “tax-free” payout because you will have already paid the tax when you filed the previous year’s 1040. So, no that amount won’t get added to your gross income.
Hi Eric,
Wondering if you have any thoughts on this situation. Two partners, C-Corp, started in 2003. Had a falling out, lawsuit, etc. For all intents and purposes my partner was listed as 100% owner until 2017, when he was ordered to give me 100% of the company by Court Order.
Now I have to sign my name on the tax returns. Looking back at 10 years of bank statements, I see hundreds of transfers from business accounts directly to his brokerage account, casinos, ATM withdrawals, electronics, strip clubs, etc. Not small transactions either — all told, probably somewhere between $1mm – $2mm of personal expenses booked as business expenses. He destroyed most of the files before turning over assets in 2017, so there’s no written justification for these transactions.
Now that I know, I feel obligated to file a Form 3949A to the IRS to report the findings and draw a line in the sand. Every transaction after I took over is documented out of an abundance of caution, but I don’t want his past actions to come back and screw me.
Am I actually opening up myself to more trouble by reporting it? I would rather lose the company / assets than have his past actions blow back on me personally. Any thoughts?
Hey Kenny.
Plain and simple–speak to a tax attorney. I don’t know what the statute of limitation is legally speaking in terms of past ownership especially since this was a court-issued transfer.
And when I say speak to an attorney, actually hire one and speak to them. Don’t do like some people and go to Quora or some other site for crowdsourced info–you need someone who is going to tell you “oh, I need much more background and detail” rather than people who want to boost their own egos by paying “expert”.
Hi,
I am a bookkeeper for a small S corp business. I am constantly logging the owners personal expenses including rental cars, vacations, dinners, home goods, ect to the business. Can I get in trouble for doing this or does it fall soley on the owner of the business if there is an audit?
That’s a great question Christine!
If you are only recording the transaction into a program like QuickBooks, then you cannot get into any trouble because that’s just internal recordkeeping. Now, if you did the tax return and knowingly deducted personal expenses on the business then you can get into trouble.
At the very least I’d hope you are classifying all of the strictly personal expenses against the distributions account and not actual expenses. If you have any access to the person who does the tax return you can raise your concerns with them and make sure you’re on the same page.
I have an LLC and I am giving myself a monthly salary, plus a year-end bonus. I need a vehicle now and can’t wait for the bonus time. Am I allowed to collect the bonus early to take care of that need?
Hello Bernadette!
When you say “salary” do you mean regular pay with all of the taxes withheld? In general, LLCs don’t pay an actual salary unless they are being treated as S-Corps which is why I bring this up.
If it is an actual salary, you can give yourself a bonus at any time for any reason. It doesn’t have to be calculated in any particular way or paid on any specific date. You can even run multiple bonus payroll cycles throughout the year.
We are a fairly new S-Corp with a profit last year of $50,000. There are two shareholders, myself & my partner each 50% ownership. If we were to take distribution checks this year, is the maximum amount $50,000 between the both of us? ($25,000 each).
Also, are profits of a S-corp taxed ?
Let me answer the second one first, Dan.
The S-Corp profits are not taxed to the business, but pass through to the shareholders to be included on their individual income tax returns. You are paying the tax based on your share of the profits and your personal tax rate.
The first question isn’t as cut and dry as it might seem. There are a few variables that go into the question of “what can be distributed”. you would be best served using the link at the end of the article to schedule time with me, since there is more information needed to accurately and completely answer this particular question.
Hi,
I’m the business operations coordinator/HR/AR/AP/whatever else they have me do. The owner of this company has direct debits for personal expenses (His health insurance, car payments, insurance). He also hand writes checks to pay for personal things, and also uses the company debit card for personal purchases for anything from dinner with his family to vacation purchases and a generator for his house.
I’ve gotten him to raise his salary, but he still does this. I’m responsible for keeping our books. (Using QB online).
He’s not going to stop this, so for the time being, how do I record these personal expenses in QB? I don’t know what category to put them in, or what to do about these.
Thanks for reading Lauren!
Anything personal should be classified as “Owner Draw” or “Shareholder Distribution” depending on the business structure. So, instead of hitting an expense account, the debit will go toward their equity account instead and not be reflected in the P&L.
If you need more in-depth and/or specific assistance, please feel free to schedule some time with me: https://clarity.fm/eric-nisall
I am a one-person S Corporation in the advertising/media planning & buying field. I live in and run the business out of my partner’s home, rent-free. My corporation is being audited by the state. My home office is my ONLY office and is used exclusively & regularly for my business. The auditor is not allowing any business-related/business supply deductions (this includes things such as an electric pencil sharpener, a desk lamp, Quicken Business software, a business laptop battery, a business cell phone charger, etc.), however, because I do not pay rent and do not have a written arrangement with my partner to this effect. He says I have no valid arguments because of this. He is also disallowing any deductions for internet or TV (both ordinary and necessary for my particular business and field) or client-required product research/online software purchases for this reason. He also says that these latter costs are not reasonable costs under the IRS Research & Experimental Costs definition since they are “advertising or promotions” (which is what my business does). This seems extremely strange to me. Am I crazy?
Hello SRD.
For starters, the home office deduction isn’t available for S-Corps. In that situation, you would need to draw up an accountability arrangement to pay whoever it is that provides your rent & utilities a fair and set amount per month and then pay them from the business account. Since you don’t pay rent, and I’m assuming you don’t pay for the utilities either(?), then you have no standing to claim any household expenses as business expenses.
As for the other expenses such as office supplies and computer programs, I have no clue why those would be denied. Unless you are unable to prove that you are using them specifically for business purposes which is a very big issue when people use personal items in business.
I would suggest you hire a tax attorney or CPA who is experienced in IRS representation. That is by far your best option.
Hi Eric, the owner of an S-Corp with 20+ employees is on payroll with a high six-figure salary. In addition to that, they run about 50-60% of personal expenses through the business (clothing, vacations, groceries, home renovations, entertainment, cable bills and the list goes on), additionally they take personal distributions throughout the year, support a second and separate business at times through this company and have personal staff non-company related on the payroll. One of the top executives has a profit share agreement, what he has come to learn though based on the personal compensation of the owner is that the profits are being depleted through the years so technically he hasn’t received the actual % of profits as it’s been considerably lower by the time the end of year comes around. Is this illegal or considered misppropriation of funds in any way? Does this employee have a case or argument especially in light of the business struggling the last 2yrs, layoffs occurring and the owner continued in the same way? Any advice you can offer would be appreciated.
Hello, I have a question. I work for a very small company and my boss is the Director of Operations. The owner of the company is rarely here and doesn’t know anything about what’s going on, because my boss approves all expenses. My boss uses his personal credit card for both business and personal expenses. For example, a $5,000 trip to Alaska, flooring for his new home, blinds for his new home, granite countertops, ATV rentals while on vacation, clothes, groceries, I could go on and on….. How do I handle this situation? I don’t want to lose my job, but I also think the owner should know. It’s getting absurd.
Hello Sarah.
I’m sorry you’re in a bad working situation. It’s never fun when you realize that your boss isn’t doing things the right way. Unfortunately, I really don’t know what to tell you, other than to maybe try to get word to the owner very quietly to “drop in to check on things” related to the books.
It’s much worse if your boss is trying to use the business card for his personal expenses and write them off through the business. It’s not quite as bad if he uses the personal card for everything and then gets reimbursed for the actual business expenses, even though it is still wrong.
I am a new business owner, and I have my company structured as an LLC and Scorp. I am 100% percent owner. My question is I was reading in your comments that you recommend doing owner distributions or owner draws and top of that paying a salary on payroll? Am i understanding this correctly? Can I just do Owner draws monthly or twice a month as my salary instead of being on payroll? On top of running this business i also have my full time job.
The short answer is NO. As an S-Corp you are required to take a reasonable salary as stated by the IRS. There isn’t a firm amount as to how much but accountants have widely used the “60-40 Rule” which means 60% of compensation from salary and 40% from distributions.
You can absolutely not take it all or predominantly as distributions.
If you don’t want to be on another payroll, you can elect to revoke the S-election as of Jan 1, 2019–I always recommend using the beginning of the year for any changes due to the clean year-end break.
That’s pretty much all I can provide you with in this type of forum. If you need more personalized service, I suggest you book some time with me to dive deeper into the issue at https://clarity.fm/eric-nisall or find another professional, but it would be best to speak with someone who has the background to deal with this type of thing and not some random person on a social media group or other sites where you cannot verify the qualifications.
Hi,
I am a small business owner (LLC/S Corp) that operates the business from my home (one room turned to studio/office) and I pay myself through payroll system (I get taxed each payperiod). Currently, I am using money from my business to pay for supplies/marketing/business travel,etc. however I wondered what else could I use money from the business for? I’m wondering about things like internet, phone, partial mortgage, etc..I’m based in California (if that matters).
Thank you in advance!
Hey Gilbert!
What you’re looking for is either a course to teach you about running your business in terms of the bookkeeping which you can find at http://bookkeepingforbloggers.com or personal consulting services which I can provide if you make an appointment at https://clarity.fm/eric-nisall.
I work for a boss who has a few companies. We have one big company that pays for products. She has a tendency to take payments from client A through Company 1 and pay off her personnel loans and business loans which she is then booking against Company 2 which has another investor. She also takes money from client B and uses 80% of to pay off the work that was then suppose to be done for client A and more of her personal expenses. Falling behind on payments for client B’s projects. These are all different companies she is moving the money through.
Client A is paying for projects to be done annually and she has now drawdown for projects that aren’t starting for months but she has spent 50% of the funds need to complete the later work. What little books there are seem to be co-mingled and it appears that she is double claiming things in taxes.
She thinks all this is fine. Is it? or are there laws being broken here?
hi my husband wants to add me to his business bank account but I am not a partner nor do I work for him is this advisable for tax purposes
Hello Eric,
I am the owner of a custom cabinet and general remodeling S Corp. 4 employees.
Can I personally contract my own business to renovate an old farmhouse I purchased personally? Pay the S Corp a fair and profitable price from my personal funds?
Company would write off payroll and materials but take in payments to show a real and reasonable profit in line with what the company sees in its other contracts.
Hey Ray!
I have seen people do that exact thing, and as long as it’s on par with your normal rates then there shouldn’t be a problem as long as you treat it like any other job with estimates, invoices, deposits, etc.
I have a sole proprietorship business and I want to take a draw to pay for an e gift card for my spouse. Would it be okay to transfer the amount to PayPal to pay for the card and make a note on the transfer from my business to PayPal, “ owner draw” .
Sue
Loved this article! Very informative and a lot of things that my coworkers and I have been noticing – a lot of spending on company card for vacations, nights out and personal expenses – took himself off payroll so he could actually just spend what he wants, now the best part – we are off the books and cannot pay taxes because he cannot “afford it” so he’s been just paying us under the table. Very frustrating 🙁
I know a CEO in a nonprofit company that pay his wife repair computer with the nonprofit company money, also his water bills, hotel is ok company pay because the seminaries, but his drinks and take his entire family, I don’t think so the nonprofit company should be pay for that, he hired a new COF, he does anything what CEO tell him to do, they don’t want nobody else do payables, and now I know why, is any places or organization we can let them know what is going on without me getting involve, I just don’t want have problems in the future when looking for a job.
Hi,
Thanks for this article. I have a couple of questions – I’m a new LLC and S Corp (once the government reopens). I am the only member. I want to set up an account to put some percentage of the money coming in aside for taxes. Can this be a personal account or should it be a second business account?
Secondly, I want to use a credit card that is not labeled “business credit card” but it would solely be used for business expenses. How do I pay this? Would I expense the credit card bill, write a check to myself, and then pay the bill out of my personal account?
The previous owners (also my parents) were sole proprietors so a lot of the things they did I’m finding I cannot do as easily.
Thanks!
Well, the first thing is as an S-Corp you should be on a regular payroll–not just taking money out, but rather the actual thing with impounded taxes and paystubs, W-2, etc. If you aren’t then you should get started immediately since that is a requirement of running an S-Corp. I suggest using Gusto and ALL my clients love it…I even use it for my own payroll.
If you want to hold back extra money in saving specifically for the pass-through income, then you can absolutely use a personal account for that. Since you pay those taxes on your personal return, it’s the perfect way to save if you use a personal, high-yield account.
Regarding the credit card, there is a reason they have “business” cards: you need to have the card registered to the business. By using a “personal” credit card, it’s in your name and theoretically you could be viewed as commingling personal and business funds which isn’t a good thing…better to just keep business stuff in the business name/EIN and your personal stuff in your name/SSN.
Thanks for the quick response. Yes, I am taking a paycheck so that is good! It sounds like the main point for sure is business is business and it isn’t personal! I will keep that in mind for the credit card as well. Thanks again!
That’s the point of this article–keep everything separated and your life will be less stressful! 😀
I have recently started a new LLC business. I know I have to pay sales tax monthly on all sales. My question is if I put all the sell money in a business account and I don’t take any draws or payroll money from the business account do I still make any federal deposits on the money in the business account? The reason for not paying myself is that I would like to build the business account up, pay business expenses and when there is enough money to pay me a salary then I will start paying myself. Until that time comes do I pay taxes on the money in the business account monthly?
I have always received a w2 and now I will be going into a field where they want me to create a business but I don’t know which one to pick
Hi Eric, if I made a wire transfer on behalf of my company with my personal checking account, can I expense the wire transfer fee and get a reimbursement?
You can pay yourself back from the company account, and it would be perfectly legal, but you should make every attempt to avoid mixing business and personal funds. If you can’t avoid it, I’d put the money into the business account as a loan, and send the wire from there. And if it’s a large enough sum that will take more than a year to pay back, you need to draw up a contract and charge a fair amount of interest.
I’m a managing member of a multi-member LLC (2 members). Periodically I use the business credit card for personal expenses. I pay for those expenses directly to the credit card company from funds from my personal account; not the business account. This clearly identifies the expense as personal. Is there anything illegal about doing it this way?
Just because it’s not “illegal” doesn’t mean it’s not wrong.
The point of creating an LLC is to have a legal entity separate from the individual members (owners including yourself). That means you should be using the business resources–cash, credit–for business purposes and not personal. If you need money to cover personal stuff, you should be taking a draw, nice and easy.
It will help keep the lines from being blurred in case of legal actions or IRS inquiry.
Hi Eric ,
I am Realtor and the sole proprietor of my S Cooperation. What is the best way for me to pay for my living expenses such as rent , groceries , travel, entertainment and daily costs of living. Is it better to just take out an amount every month to add to another personal checking account or continue to use my business card ? I dont have anyone else its just me.
If you are an S-Corp then you MUST take payroll–actual payroll meaning like with withholding and everything. That is how you should be taking the majority of your money. If you haven’t then you really need to get on that ASAP. I recommend using Gusto as they make it a breeze to manage.
If you aren’t an S-Corp but a sole proprietor, you should calculate a budget and divide it in half, taking one half on the 15th and the rest on the last day of the month to simulate a “salary”. But it should be transferred to your personal account first.
Regardless, you should never be using your business assets to fund your personal life.
Hi Eric, great article!
I do have one question that I have not seen asked, at least not exactly like mine.
Background:
Last year I operated/was taxed as a Sole Proprietor Single member LLC. This year I started S-Corp election, got my payroll running through Gusto, and opened my Business checking account and I’m depositing my business income checks into my business checking account. I also set up an accountable plan to cover home office and health insurance expenses such as the portion/percent of my house used for utilities (water, electrical, internet, phone since I am a web developer I use all of these in some way or another for the business), home office depreciation(I ama home owner) and Health insurance premiums/HSA contributions. I also make SEP IRA contributions to myself from my business checking account(up to 25% of my salary).
Questions:
I recently(this year) got a business credit card with my business EIN.
1) I now pay the phone bill and Internet service directly from it. I am planning on marking the portion of those things I use for the business as a business expense and the rest as owner distribution and paying the credit card charges out of my business account. Is this correct? The reason why I changed it (from paying from personal account and getting reimbursed) is because the business credit cards has amazing perks and cashback for some business expenses including Internet and Phone services.
2) I payed last year’s Self employment tax bill(I was still a sole proprietor LLC so no separate entity, although I was using the same EIN) with this business credit card (it had 0% intro APR) and plan on paying it off through the year from my business checking and marking it as owner distribution as well. Should I, instead, take the owner distribution directly to my personal account and pay the credit card bill associated to these taxes from my personal account, instead?
First, let me state that I would never recommend that anyone claim depreciation on their home office unless it’s a separate structure–it is generally not worth the hassle of having to deal with depreciation recapture when selling.
For the question about the phone/internet expense, you can get away with doing it that way. The problem with your reasoning is that you can start justifying putting more and more of your personal expenses on the business card for the sake of “earning rewards”. Additionally, if you are getting a cash back you can’t apply all of it to the business deduction because part of that “rebate” was earned by your personal use. So you have to be really diligent about how you go about tracking your spending and using your business for personal expenditures.
The question about your taxes is similar–as a Single Member LLC, your tax liability was a personal liability and should never have been paid for with the business card. The best way to do it is to increase your salary first rather than relying on “distributions” to cover all of your personal spending. For one, you would have to have enough basis to support all of the distributions yo are planning. And secondly, you should be careful to not be taking too much of your personal income in the form of distributions vs real salary. That can draw the attention of the IRS for evasion of Self-Employment taxes, but that all depends on your income and personal position in the business.
Hi Erice, I have a client who comingles funds. She has a single member LLC for tax purposes but uses her personal account for business expenses. She claims that is much cheaper to establish and pay business bills through her personal account. For example, mortgage, light, Gas, Comcast, and other bills in her name and not the business name. The business is a personal care home. 90% of the home is used for the clients and 10% is you for herself because she living in the home too. She owns the home before she establish the business as a LLC. Does she have to put these bills in the LLC name?
I would suggest to her that she would be best served sitting with an attorney to ensure everything is structured and titled properly. It’s not so much an accounting issue at this point but a liability issue since she live in the home and would want to have everything separated in a manner that keeps her and the business as separate as possible. The attorney will be able to tell her which items should be set up under the business name in order to protect her from any potential legal actions.
Hi Eric,
I have a partner in an LLC that has been collecting money in the name of our business but having the checks made out to her name instead of the company and depositing into her personal account. The business is in the red and she has used this money to live. The partnership is a general 50/50 LLC. I have no way of knowing how much has actually been taken in. This was sponsorship AD space in a book meant to raise money to help with expenses.
I feel there has to be some illegal activities here.
Hey Jason!
Sorry to say that sounds like something you need to bring an attorney in on.
My partner and i received a bank loan pay expenses for the business to get started, she pays herself a set amount a week should she be paying herself an hourly wage according to what she actually does
out of that bank loan
Hello Aggie
That isn’t something that can be answered based on two sentences. I would suggest you hire an accountant or business attorney and lay out all of the income, expense and partner payment issues and have them draw up either an operating agreement. That way it will be in writing and agreed to by both parties and you will then know how what to do with the funds and everything else that comes into the business going forward.
The comments, questions, and answers are a wonderful supplement to this article. I will try to keep my question pretty straight forward as a way to help myself make things concise and a bit more solid in my head as well. I am a newly established Sole Proprietor (therapist) and aside from rent, business cell phone, and a few small expenses I am a mostly cash in business. My understanding is that it makes sense to open a business act to separate personal from professional. I plan to do this next week once I have a TIN. What I hear is that once this act is established I funnel all my money into this act. Make 1-2 draws per month to cover personal expenses ant that this is not taxed on my personal filing as it will be taxed under my business act? This is my only point of confusion and I just want to prep. Do sole proprietors need to file quarterly? I have heard various things on this side and don’t want to get into trouble right out of the gate. Your thoughts would be appreciated. Thanks for this great forum of information!!!!!
Hey Corey!
So to answer your questions simply:
Hope this helps!
Hi Eric,
Thanks for writing this I have been looking for a well laid out article like this for awhile.
I have a single member S-Corp, I have a third party payroll set up so I can pay myself a salary. If I write a company check to myself as a “distribution”, how and when is that distribution money taxed?
Hey Jake.
Distributions are not taxed as long as you have enough basis. What happens is the net profit from the business goes on a K-1 which you report on your 1040 and is taxed there. Since the tax is already paid, when you take out the profits in the form of a distribution, it’s not taxed again. It’s simply a shift from one balance sheet account to another–not an income event at all.
Thanks Eric, to follow up then.. if the net profit currently in my business account was all earned in 2019 and thus not taxed yet, then I would not legally be able to take any distributions?
You could but there is a big issue I always warn clients about–if you take out distributions during the year in anticipation of a profit, and then you have a downturn or slowdown or surprise expenses, you may have to put that money back into the business or pay taxes on it since you took out more than you were entitled to.
Ok! I’m loving the information and just saw your clarity gig. I’m gonna book with you here in the next week to get all the way into this. Thanks again!
You got it Jake!
I opened a new business account mainly for the travels points; but after I used it and read the info, I am going to stop using it. However, for the things I did use it for–a cruise no less…am I going to be in trouble for using it for a personal purchase??
Hello Kim.
I don’t have enough context and info about your business or the specific way you went about using the account. Basically, if the travel was 100% personal and you didn’t reimburse the business for the payment, it’s not the right way. Not to freak you out or scare you, but there is always a chance that you can get audited or looked at and there is no way to predict who gets chosen.
If you can correct this now you should be good and just be careful going forward when mixing business and personal money. You can absolutely split expenses between the two but the ratio has to be legitimate and defensible, ie: your cell phone isn’t 100% payable from the business account if it isn’t a separate line dedicated to the business.
Feel free to schedule a consultation if you need/want more guidance on the subject at https://clarity.fm/eric-nisall
Hi I have a chase debit business card. I withdrew money from an atm twice from a casino on it. Will I get in trouble by the irs?. It only happened twice.
Hello Esther.
I cannot say whether you will get in trouble or even be audited. The question is “is it worth the risk?”.
No one knows if they will get audited or looked at by the IRS, but the best way to be sure that you will be cleared in the even they do call on you is to do everything the right way. That definitely includes keeping your personal and business money separated at all times and if you have to take business money out for personal reasons (or vice versa) make sure to do it by transferring the money then withdrawing it.
This post was an awesome read! I just want to clarify my understanding of the information gathered from the article.
I’m 21, I’m an entrepreneur, have registered my own LLC, and plan to create a separate business account at my credit union.
In order to spend the money for personal reasons I make through my business (i.e investing / or whatever ), I first should simply transfer money from my business bank account to my personal bank account?
Also, what would happen if I decided to transfer ALL the money from my business account to my personal account?
While I don’t think this would be recommended, I’m new to all this and just curious.
Do you know of any valuable books I could purchase to gain more knowledge on this type of subject matter?
Thanks a million,
Matthew.
Thanks Matthew!
You’ve got it right–if you need money for personal stuff, regardless of what it is, just transfer the money from biz to personal first then go ham with it ?. The key is to have that shift so you are keeping everything separated and not commingling money.
If you are a single-member LLC (meaning you are the only “owner”) and not being taxed as an S-Corp, you can take out every last penny at a given time if you wish. I wouldn’t recommend it because, just like with you personal finances, you should have cash reserves to cover overhead in case you get sick/injured or simply have a bad period of time business-wise.
I am very out of touch with what’s “required reading” lol. i would suggest reading through all of my entrepreneurship articles as I cover stuff that most people online wont–the realities of running a business, not just the sexy topic of earning 6-figs and retiring at 25. You can head over to Amazon Small Business Books for some ideas of what to read.
Thanks!
Hi Eric, thanks for all the insights! When you say ‘transfer the money from business account to personal account’, can this be done electronically online? And vice versa (transferring from personal to business?) Thanks
Hello Mandy!
Online transfers work the same exact way as when you write a check or have the bank initiate a transfer between accounts.
Thank you for this helpful article! I have separate business and personal accounts. I have an LLC sole prop. However, I need a new phone and I use it for both business and personal. I am not sure where I should take this expense from… I know the entire cost of the phone cannot be deducted as a business expense as it is also for personal use. I don’t want to confuse things by taking it out of my business account but I also want to make sure I am treating it as a business asset as well. Any thoughts? Thank you in advance!
Hey Ann!
What I usually do is tell people to purchase it through the business. Then, when you have to book the expense, split it between the telephone expense and the draw account for the respective percentages based on your usage. That way, you are getting the benefit of deducting part of the cost while not trying to take more than allowable.
Thanks for your quick response! Quicker than my CPA! I don’t want to carry debt so I’m going to be paying for the phone in full. Would you do a one time split between telephone expense and draw account that total the full amount of the phone?
Thanks again! Awesome help and article!
My pleasure, Ann!
It would work regardless of how you pay–if it’s paid in full, you do it once and if it’s leased you would simply split the monthly bills. Nice and easy ?
Eric, VERY nice info covered here. However, one thing I didn’t see covered here (or anywhere I’ve searched) is this: For a single member LLC–Is it okay to open a business brokerage account and use it for the LLC’s operating account instead of using a standard business checking account at my local bank? Most brokerages offer checkwriting and will supply a checkbook for the LLC. I would pay all of the LLC’s expenses from it as well as the Member’s (me) quarterly distribution. This way, any excess money in the brokerage account could be invested for the LLC. This seems to make more sense than the LLC’s excess money sitting in the local bank account earning zero interest, which is the case right now.
Hey Robert!
Theoretically, you can do whatever you want with the business money as long as it’s in an account under the business’ EIN. However, I would imagine that each broker has its own set of rules governing the deposits and withdrawals, so it may not be feasible. Besides, why would you want to tie up all of the business money in investments and pay all of the commissions when you have to invest then liquidate, not to mention putting the money at risk.
There are plenty of options for earning interest on business funds without the risk: https://thecollegeinvestor.com/24389/business-savings-money-market-accounts/
Thanks, much appreciated, Eric! Just to clarify, is it okay/legal to use a brokerage account for the LLC’s main operating account? Fidelity Brokerage offers everything I need, including Money Market interest on excess business cash and free checks. But I just wanted to be sure that it was ok/legal to use a brokerage account as the LLC’s only operating account. I can’t find any information that says otherwise.
I work for a newly formed S-Corp. A manufacturing business that was recently purchased by a group of long time employees. One owner owns the majority, and has made a few questionable decisions since the ownership change. He has requested that I do not discuss the finances with the other owners because they have “other things to focus on.” The practice before the purchase (under the old company) any time travel was necessary, the business would provide an advance for expenses. After returning from the trip, an expense report would be turned in, and any unused expense money would be given back to the company, or the employee would be given a check for expenses above and beyond the advance given. Since the sale, the majority owner has taken multiple advances, provided reports, but never reimbursed the company for difference. He has owed a small sum for a few months now. He is traveling again next week, and took quadruple the usual amount to travel than he usually does. Taking his balance to over $6k. Now I realize this isn’t a huge sum of money, but he continually pushing the ethical boundaries. He took his wife on a “business trip” and turned in her expenses as business expenses. He purchases things for his office, purchase clothing with our logo, and other things without reimbursing the company, while the other owners who are employed do not receive any of those “perks.” I’m beyond frustrated because I feel as though he is continuously taking advantage and the other ownership has no idea. I’m scared that if he is willing to do things so early on in the business, how will it worsen as time goes on. How will this ultimately impact the financial health of the company? Help! What do I do? Is there a good way to explain why this isn’t okay? Or am I completely off base and he is within his rights to these things???
All owners of a business have the right to know everything that is going on and have access to any information they want. So technically speaking, the majority owner doesn’t have the right to prevent the others from knowing anything.
How reimbursements are handled are an internal decision. Some companies make employees lay out the money and then reimburse the expenses upon presenting the expense report. Other companies pay for all of the travel/accommodations for the traveler. And some, like yours, do a combination of allowance plus repayment/reimbursement depending on the end result.
If anything is being purchased with the company logo on it, technically it’s considered marketing so it can be 100% paid for using company funds. Now, what he does with his wife’s expenses and other things I wouldn’t be able to speak on because I don’t have access to the books to see how those transactions are being booked.
you can always take one of the owners aside and let them know your concerns in confidence, or just approach the majority owner and let him know that you are uncomfortable with how some things are being done and would like to discuss it. Odds are you’ll be given an ultimatum to either deal or quit, but at least you’ll know that you tried to do the right thing.
My sister was appointed CFO by a family run LLC. All money beyond the initial investment was to be considered a loan to the company at 10% interest. Now, she wants separation and is claiming that she has loaned the company more than she has receipts to prove. In addition, she co-mingled funds for the business and personal accounts making it extremely difficult to separate actual business related expenses from her own. She is threatening litigation. I feel that she should be required to provide receipts and/or descriptions of what each expense was for but she refuses to provide them. Is this something unreasonable for me to expect before paying her back?
Hello Zeaos.
This is something you need to speak to either the accountant or attorney who works with the family on this about. I don’t have enough information nor the background to make any kind of suggestions.
What would be the repercussions of an owner taking large amounts of cash out of the register at the end of the work day for personal use? Wouldn’t that be considered an income and need to be taxed?
It’s hard to say…
Sometimes there will be no repercussions as no one will know. Other times, like under audit, if the money wasn’t reported as income yet was found to have been then a tax bill, plus interest and penalties would be the result. Each case will vary.
A fool and his money are soon parted. Quickbooks are great but if you have a business you better let a qualified tax expert do your taxes. I used tas slayer and got an IRA audit. NOT fun. and very costly, if you have your own business and you are the expert at what you do why would you not hire an expert to do your taxes for you, its their job its all they do you will save so much more on your taxes the tax preparer will more than make up their fee, Trust me I know 1st hand. Oh I know you are smarter than me and would never get audited by the KGB I mean IRS. maybe so but a good professional tax preparer (not H & R BLOCK HEADS) WILL MAKE YOU MONEY
Hello David.
Using Tax Slayer wasn’t what caused your audit. It was either a random selection or something that you put in the return sent up a red flag.
Also, no tax preparer can “make you money” unless they are putting incorrect information on the return or leaving off info, so that makes them nota good tax preparer. Please keep this kind of talk–and the paranoia–off of my site in the future.
Thanks!
What about for a small business where literally every dollar you make keeps the roof over your head and food in your mouth? I mean down to the cent. I am a home owner, self-employed who does Lyft & dog walking. I started an LLC and I am about to open a business bank account. However after reading, I realize every dollar I make pays for my mortgage, car, gas, food, pets, etc. I will have maybe $10 left a week. My self employed “business” funds the cost of living. I am attempting to save for a rental property investment in the future (goals).. but that down the lines and me putting $40 into savings a month isnt the best and hopefully I figure out how to do my taxes properly. I feel stuck, but I am sticking to my entrepreneurial spirit and pushing through
Hey BM!
You can absolutely take money out for living expenses, the key is to not use the business as your personal bank account. That means, don’t pay personal living expenses directly from the business funds and don’t take money 4 times a week either. You need to treat the business as a separate entity especially since you are doing an LLC which is a legally it’s own “living, breathing entity”.
Simply do a budget and split it in two. then take half on the 15th and the other half on the last day of the month to simulate a paycheck. Also you have to remember that your taxes are based on the net income of the business before you move the money to your personal account–those personal transfers are not business deductions.
Excellent information Eric. Thankyou. Turns out I’ve been doing exactly that, I made an LLC and got a business Bank account and then without having a real business income, I direct deposited from my employeed W-2 taxed income… so will I have to be taxed twice??
As long as you don’t record your deposits as income you won’t be paying tax twice.
But here’s a question–are you literally taking all of your W-2 paychecks and dumping them entirely into your business?
Thankyou! Yes, I didn’t report any business income or expenses and I haven’t had any, besides (yes, all of) my W-2 paychecks and personal expenses. After reading this, I understand if I do begin business, it’s crucial to separate the finances. Considering it now, I’m grateful I did, because It will mean I can show a “history” if I’m looking to get a business loan or something.
Hi Eric
Here is my question…I have a friend who has sole prop llc. She uses her business account as a personal bank account which I understand is legal however, she has asked me to do her books and I have seen some questionable practices. It appears she spent quite a lot of money over several months and then there are a ton of reversals made through Square. The reversals total a lot of the personal expenses. I only have access to csv files from the bank and have no indication as the why these reversals were done. Some of these are one for one and they are totalling several thousands of dollars. First, it appears (and knowing this person) that money was spent, charges reversed and then cash pulled out of ATM or transferred out to a personal account. Is this illegal? It seems at the very least this could be considered fraud and theft. And do I need to report this type of behavior to someone?
Thanks
Thanks for reading!
Unfortunately, it’s a very difficult situation to break down without having specifics. If you are uncomfortable I would simply say that you don’t think you have the capability to sort through everything and suggest they go to an actual accounting firm (assuming you aren’t an accountant). They will make your friend give them all of the relevant info then sit her down and face everything directly.
So if some deposits money illegally appropriated into a business account then uses that money for personal expenses can the IRS charge the individual for the amounts used as personal income rather than it being business income?
Hello Lina.
If you have questions about legal issues, you should go speak to a lawyer. They are the only ones who can speak to those issues.
Thanks for the article. Earlier this year I joined a small, growing truss manufacturing company to oversee the finances, administer benefits, etc. The business is set up as an S-Corp, split 50/50 between the President and his wife. The President actively works in the business and takes a bi-weekly salary and a regular distribution as well. His wife does not work at all nor takes a salary. Given the size of the compnay (approx. 25 employees, $5M in revenue per year) and the fact that he’d never employed a full-time accountant before, I fully expected some issues with personal expenses being intertwined in the business. I’ve since had conversations with the President, explaining that all non-business expenses should really not be run through the business accounts, but that if they are, I will properly classify them as distributions. However, I think he still mixes personal with business in the same trip to the store, then he never turns in the receipt and tells our accounting clerk that the whole bill was for shop/office supplies or tools, etc. I’ve warned him that without receipts, if the IRS were to audit our business it would be very hard to prove the business purpose of the expenses and many would probably be disallowed, resulting in additional tax/penalties. I also found out recently that when certain customers pay in cash (rather than the usual check or credit card), he’ll ask our accounting clerk to delete the sale out of our accounting system, and he’ll pocket the cash to avoid paying taxes on the job specific income. I’ve warned him that it’s a form of tax fraud and that the legal way to take money out of the business is through payroll or owner distributions.
Ultimately, my question is this: I hold a CPA license and I’m concerned that in the unlikely chance we were selected for an audit, that my license would be in jeopardy for allowing these things to occur under my watch. What are your thoughts on this? Also, what else can I do to convince him of the benefits of separating business & personal and the importance of detailed record keeping?
Hey Trent.
Unfortunately I don’t have an answer regarding your license. However, I would seriously consider speaking to an attorney about what your legal responsibility would be, particularly if you are the one signing off on anything. Or you can contact your state’s CPA board and present them with the facts and see what their response would be.
As for what more you can do–not much I’m afraid. All you can do is try to provide them with facts and rules and hope that they will be smart enough to listen to your guidance. Perhaps you can do some research into cases where the IRS actually audited a business then threw out deductions of personal expenses misguided or where they found unreported income and applied penalties and interest to show that it indeed a real possibility.
If none of that works, then I think the only logical alternative would be to look for a new position if you don’t want to have any hand in the goings-on of that business.
Best of luck!
Hello Eric! This was a very great read and I’m young buck entering in the entrepreneurial world by opening up my own business and I had a huge sigh of relief, to find out that I’ve been on the right side of my expense. Would you have any possible references or resources I can learn more in-dept on this matter. I’ve pretty much became a regular visitor at my local library and I’m running out of Google searches terms lol. Anything will help, thanks.
You an look at the rest of the Entrepreneurship section of this site. I cover topics like incorporating, finding an accountant, the Self-Employed Health Insurance Deduction, issuing 1099-MISC and a bunch of other topics related to running a business.
Hi eric,i m planning to open small business using 401K ROBS,can i write myself a check from c-corp for my personal expenses like mortgage,educational plan,or even pay credit card?
Thanks.
usabuycialis delivery! Smile more. people
[url=https://usabuyciali.com]daily cialis benefits[/url]
See you in New Year USA 2020
[url=https://usabuyciali.com]Cialis buy in usa[/url]
I own a business and I’m guilty of sometimes using my business account for my personal needs and I owe money to the IRS which is what I’m dealing with now. However, I recently just opened up my personal account to start using after all this come up! Will it be bad for me once the IRS looks at everything to decide on a payment plan?
Hello Sammie.
There are no guarantees with the IRS, but most of the time you won’t get “looked at” on a detailed level like that for a payment plan. If, however, you were simply using the business money for personal stuff and classifying it as a draw/distribution, it will be less damaging than if you were treating personal costs as business expenses.
If the latter is the case, I would seriously suggest you reach out to a tax attorney or CPA first to discuss your options including amending the past returns to reflect the proper classification of transactions.
Great article, thank you. In my opinion what is even bigger risk than IRS issues (assuming business has cash flow and can pay IRS) is setting yourself up for personal liability. When doing an LLC, Corp, partnership, is to be protected by the corporate veil and keep personal and business separate like Mr. Nisall writes. If you as a business owner go to litigation with an employee, vendor, customer, partner, and their lawyer is any good they will push to be awarded a personal lien. If they can prove you use business for personal, personal for business, even occasionally, there is good chance they will request “pierce corporate veil” it happens more often than not with small businesses in CA at least. It very easy to prove if you have specific examples, and potentially cost the business owner more money. I speak from experience with a past partner that used the account as his piggy bank, he refused to pay the money owed $125k and the judge agreed with my lawyer that he chose not to pay out of spite, and abused the protection given with a California Corporation. We tried to settle for $85k before litigation just to get it over with, partner chose to take it all the way assuming he was protected, I now have a $187,500.00 judgement on a home they are trying to sell now.
Hello Eric,
I am the owner of my business company and I am the only who work for the company. How should I pay myself? I have the business account. Transfer or check?
Hi Liset.
That would depend on how you have the company structured. It sounds like you are a sole proprietor or Single-Member LLC, so then you can simply write a check or do an online transfer.
Great article! My husband and I own an LLC as of last year and have been scouring the internet for answers as to how we should go about paying our rent and utility bills and auto loans. He’s been full-time in the business for years, but I just switched from my W-2 job to being full-time entrepreneur a month ago. We used to be able to get by paying personal expenses from my job, but now since we’re working for ourselves, pretty much all income goes into the business account. We want to be ethical and legal and avoid IRS trouble, but we use part of our home and our cars for business use. We claim it on taxes, but can we use the business account to pay all or part of the monthly expenses?
Hello Mel.
The sarcastic answer: it’s your business you can do what you want.
The real answer: you should never pay personal expenses from the business and you should never pay business expenses from your personal money directly.
Like I lay out in the article–make a monthly budget of your personal financial needs then divide it by two and make transfers of each half twice a month. That will simulate receiving paychecks and then you can pay your bills from your personal money.
When you have a business, especially a partnership that is a separate legal entity that files its own tax return you should keep a very clear distinction between your business and personal money.