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Paying Yourself Out of a Business


iacas
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Before we begin, let me be clear: this is not the case here:

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You own a business with another partner. You keep your money in a bank account, and split everything 50/50. Income, expenses… all 50/50.

When the business receives a payment, it goes into the bank account and half of the money is yours. When the business "pays yourselves," you both take equal sized withdrawals. So if someone pays the business $1k, you eventually both get $500.

When the business buys some physical goods, or purchases services, the payment comes out of the bank account and you thus each effectively pay half.

Here's the question:

  • There is a service for which a person I'll call "Contractor" charges $10/hour.
  • You decide to do this service yourself so you don't have to pay the Contractor.
  • How much do you pay yourself?

In other words, if your shared business account has $10,000 in it, and you do 100 hours of work (which would pay the same $10/hour), how much do you pay yourself, considering that half of what you are paying out was "yours" to begin with already?

P.S. It's a bit of a twisty one, but we know the answer. It's just a bit "fun" to think about.

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You pay yourself $10 per hour. $500 of that comes from you partner’s half of the $10,000 and rest from your half. Same as if you had paid the contractor.

The business gets the full $1,000 expense on its P&L and you get $1,000 income via 1099, K-1 or W-2 depending on how the accountant wants to do it.

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10$/Hour x 100 Hours = $1,000 expensed to to the business. 

So, $500 comes from your account, and the other $500 comes from the partners account. Since expenses are split 50/50. 

Since you are paying yourself with your own money, then that is a net zero. Since, you have to take out $500 of your own money to pay yourself $500.  

You just get paid $500 from the partner's account. So, you do $1000 worth of work, but get paid $500 for it. 

 

 

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Pay yourself $1,000.  The $9,000 left is split w ur partner... if it doesn’t sit in the acct.  ..bc Your labor isnt a distribution, it’s an expense.

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23 minutes ago, saevel25 said:

You just get paid $500 from the partner's account. So, you do $1000 worth of work, but get paid $500 for it. 

Not quite.  Business expenses go up (reducing taxable income) and assets drop by $1,000 and your personal income & assets go up $1,000.  Then you pay personal income taxes😩.  

Notice how the gov’t wins either way?

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Pay yourself the full $1,000. Any less and the partner gets 50% dibs from the remainder via the company. IMO it's that simple. 

On 9/16/2021 at 8:26 PM, StuM said:

Then you pay personal income taxes😩.  

Notice how the gov’t wins either way?

Sure, but I will pay IT on a higher number any day since it is still a net gain.  

OTT, we used to have some workers at the high end of their pay scale that refused overtime because it puts them in a 'higher tax bracket'. We had to explain them that the higher tax bracket applies only to the overage amount. They will still net more. 

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12 hours ago, GolfLug said:

OTT, we used to have some workers at the high end of their pay scale that refused overtime because it puts them in a 'higher tax bracket'. We had to explain them that the higher tax bracket applies only to the overage amount. They will still net more. 

I've seen people like that.  Also, thinking it "Pays" to "Have a tax loss".  I would prefer to pay tax on a $ gain then save a little tax on a $ loss.  Only limited exception would be if you are very close to the line on your Social Security going from 0% taxable to 50% taxable or to 85% taxable, but that is not all that common.

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12 hours ago, StuM said:

Only limited exception would be if you are very close to the line on your Social Security going from 0% taxable to 50% taxable or to 85% taxable, but that is not all that common.

The year my wife started collecting SS she was still working as a hygienist.   She had to cut hours to stay under the 50% taxable.   

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