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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I own/operate a daycare business. Ive always only filed business

Resolved Question:

I own/operate a daycare business. I've always only filed business taxes since opening the daycare. I usually end up paying approx. $1000.00 every year in taxes. A friend told me that if I paid myself a wage "on the books" even if my business couldn't afford to pay me a wage, I probably wouldn't owe so much at the end of the year. Is this true? And if so, would I be paying ss, unemployment and state & federal tax every month on the wages I pay myself? How do I figure out what those would be every month?
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.
Hello todd,

How is your business set up? You you operating as a sole proprietor, LLC, S Corp?

Customer: replied 7 years ago.
sole proprietor
Expert:  Merlo replied 7 years ago.
Hello again todd,

Thank you for the clarification.

Whether you pay yourself a wage throughout the year or not, you will still end up owing the exact same amount of taxes overall for the year. Paying yourself a wage does not make your tax rate change, nor does it change the amount of your taxable income.

As a sole proprietor it would not make any sense from a paperwork standpoint to pay yourself a wage, as all of your earnings are solely yours and reported on your tax return at the end of the year. If you start issuing yourself a formal paycheck, then you need to deduct your taxes (federal income tax, state income tax, SS and Medicare taxes) from each check. You then need to remit those taxes to the IRS by filing 941 employment tax returns each quarter.

I can only assume that what your friend meant was that by paying yourself a wage throughout the year, since you would be deducting taxes from those checks then you would not owe as much at the end of the year. But the same thing can be accomplished by simply making estimated tax payments to the IRS each quarter. There is no need or reason to issue yourself a formal paycheck.

If this was helpful please press the Accept button.

Thank you todd and let me know if you have more questions.

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