Getting paid when you for yourself isn’t as simple as it may seem. Sole proprietors should follow these guidelines for paying themselves in a way they don’t get in trouble with the IRS or other government ncies.

How do you get paid when you a one-person, unincorporated ? It seems pretty simple, right? You sell or do something and get paid. That’s how self-employment s, right?

If only it were that simple. Any time you’re getting paid for something, the IRS along with a few other federal, state, and local ncies want a piece of it. For tax purposes, if you’re running the as a sole proprietor as many freelancers, consultants and independent contractors do, you don’t pay yourself a salary and can’t deduct your salary as a expense. Instead, your personal income from the consists of the profits and those get added to your personal income .

So how do you it out when you can’t wait until the end of the year to pay yourself? How do you set things up so you can pay yourself on a regular basis and make sure the expenses are tracked in a way that makes accurate reporting to the IRS and other ncies easy at the end of the year? Here’s the best way to handle things.

RELATED: Top 5 Invoicing Programs to Help You Get Paid Faster

Am I a Sole Proprietor?

First, you need to be sure you understand what a sole proprietor is. According to the IRS, “a sole proprietor is someone who owns and operates an unincorporated by himself or herself.” The can have a name that’s different from your given name (or not – that’s up to you). But even when the has a distinct name, if you are the only owner and haven’t incorporated the , all the profits of the pass through to you and are reportable on your personal income tax forms.

As a sole proprietor (or self-employed individual) you will need to pay state and federal income taxes on all the profits, and you will also need to pay a self-employment tax. (The self-employment tax is simply Social Security and Medicare taxes for the self-employed.) Since your “salary” when you are self-employed is actually the profits from the , the self-employment tax is calculated on the profits.

Separate Money Matters from Personal

As a owner, you’ll need to keep accurate records of your income and expenses. Doing that will be extremely difficult if you all your earnings into the same account you use for personal expenses. Comingling funds with your personal account may also make it more difficult to prove expenses were strictly for if they look like personal expenses.

To keep things simple for yourself, your accountant, and the IRS, open a checking account for the . If you using a name, open the account in your own name, but be sure to use it only for the . If you are using a name (ie, Joe’s Clam House), the bank will require a copy of a DBA certificate (certificate saying you’re doing under a fictitious name) or a license, or both. (Check with your bank to out what they’ll need. Some banks may require a DBA certificate for a even if the “name” is your name.)

Use this account to deposit all income from the . Checks, ACH deposits, edit card sales receipts, and any other income should all get deposited into this account. Pay all the bills from this account as well. Your bank statements, along with records you keep about income and spending, will give you and your accountant a clear picture of how much the earned, how much it spent and what its profits are. (If there’s a name on the account, it will also help your look more established to customers.)

If your is homebased, get a separate phone line for your . You’ll be able to deduct the entire cost of the phone – plus you can then answer all calls with your name so you sound more professional.

If you will be charging any expenses, get a separate charge card for use by the business. Chances are the edit card will be issued in your name, not the ’ name, or if the name is on the card, yours will be too. Use this edit card only to buy s or services for your . Do not make any personal purchases with the card. That way, you’ll know that everything charged to that card is for the .

Use an accounting program to record all the deposits and withdrawals from the checking account. Use the accounting program to characterize the nature of the expenses as you pay them. (ie, website hosting, office supplies, accountant’s fees, etc.) Doing so will let you see at any time what your profit (or loss) is. Tracking expenses like this in your accounting program will also make it much easier at the end of the year to categorize your spending for tax purposes. It will also help you budget for the next year and analyze your spending patterns.

Paying Yourself

As a sole proprietor, you can pay yourself whenever you want (and the income allows). Ideally you’ll do this on a regular basis. When you do pay yourself, you just write out a check to yourself for the amount of money you want to withdraw from the , and characterize it as owner’s equity or a disbursement. Then deposit the check in your personal checking or savings account.

Remember this is “profit” being withdrawn, not a salary. So no Social Security or Medicare come out of your check. But you will have to pay those taxes (the self-employment tax), so remember to set aside money to cover the expense. Once the is profitable, you’ll be paying these amounts quarterly in the form of estimated taxes, but in your first year of operation you may not have to pay anything until you file your annual return.

If you have expenses that will ultimately be shared between personal and accounts, (ie, the cost of Internet use, if your home-based uses the same Internet connection the family does) those costs won’t get recorded in your accounting program. You’ll calculate them at the end of the year when you prepare your taxes, and take a deduction for them on the Home Office Deduction tax form.

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About the author:
Janet Attard is the er of the award-winning  Business Know-How small web site and information resource. Janet is also the author of The Home Office And Small Answer Book and of Know-How: An Operational Guide For Home-Based and Mio-Sized es with Limited Budgets.  Follow Janet on Twitter at http://www.twitter.com/JanetAttard.

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