Have a Tax Question? Ask a Tax Expert
I am a sole proprietor. Do I "pay myself" a salary, or just settle for the year end profit/loss? If I do pay myself, where would I deduct it (which form). If my business shows a loss how would this change things?
Thank you for your question.
As a sole proprietor or single owner LLC, you do not pay yourself a salary. The IRS says you must take a draw to pay yourself.
This means, whether or not you take the draw you report all earnings and expenses related to the business on schedule C, and pay taxes on the net profits. Your draw is, in essence, a draw on earnings. Self Employed and sole proprietors pay taxes on their net business profits, and pay SS and MC through Self Employment Tax.
You would use the following forms:
Schedule C: http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
Schedule SE: http://www.irs.gov/pub/irs-pdf/f1040sse.pdf
If your business shows a loss you will not pay that much tax. You may have a net operating loss to carry forward to the next year, or even to carry back to the past 2 years or first day you were in operation if less than two years.