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.