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Taxation of Owner’s Salary for Sole Proprietorship

A reader asks: My business is a sole proprietorship. When I pay myself an income from the business, how is it taxed and how do I report it? Does it count as salary? Is it a loan? Any help you can offer would be greatly appreciated!

My answer: If we’re talking about Federal income taxes, it’s neither salary nor a loan. In fact, it isn’t anything.

As far as the IRS is concerned, for a sole proprietor, there is no distinction between the business and the person running it. As such, moving money from the business’ checking account to your own checking account will have no tax effect whatsoever. It would be analogous to you moving money from one personal checking account to another personal checking account.

Quick note: They are going to tax you on the money that goes into the business (ie, the profits). As a sole proprietor, the business’ net profit will show up on your own personal Form 1040 (on Line 12). This will be included in your taxable income, and you’ll therefore be paying taxes on it.

But again, for sole proprietors, Federal tax law doesn’t distinguish between your personal checking accounts and those of the business. As a result, moving money from one to the other will have no tax effect.

For More Information, See My Related Book:

Independent Contractor, Sole Proprietor, and LLC Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • Estimated tax payments: When and how to pay them, as well as an easy way to calculate each payment,
  • Self-employment tax: What it is, why it exists, and how to calculate it,
  • Business retirement plans: What the different types are, and which one is best for you,
  • Click here to see the full list.
A testimonial from a reader on Amazon:
"Quick and easy read. No fluff, just straight to the point and gives you more helpful information that you might imagine. If you are looking to get the bottom line information you need to start your business right then this book is a must have."
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