In this instructional video, online business attorney Brittany Ratelle explains how entrepreneurs should compensate themselves while maintaining legal and tax compliance. She begins by emphasizing the critical rule of keeping business and personal finances separate, warning against commingling that can pierce the corporate veil. Ratelle outlines two simple methods for owner compensation: writing a check or making a bank transfer, each labeled clearly in the memo for bookkeeping clarity. She then clarifies the tax treatment of a single‑member LLC or sole proprietorship, noting that the IRS views them the same and that all income is subject to self‑employment tax. The video shifts to the S‑corporation election, describing how an LLC can elect S‑corp status, the necessity of running payroll, and the concept of a “reasonable salary” versus dividend distributions that avoid self‑employment tax. Ratelle discusses the administrative costs of payroll, unemployment tax, and FICA, explaining why the S‑corp structure typically becomes advantageous around $50,000 of annual revenue, though the exact threshold depends on individual tax brackets and household income. She concludes with practical steps: forming the LLC independently or with an attorney, setting up payroll (e.g., Gusto), and maintaining separate accounts to protect personal assets. Throughout, she stresses consulting a CPA or tax attorney for personalized advice and invites viewers to ask questions.
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Have you ever wondered how you're actually supposed to pay yourself in your business, especially if you are an LLC? Well, I'm Brittany Ratelle and I'm an online business attorney and I actually love answering these questions. And today I'm going to walk you through my step-by-step plan and very simple drawing to make sure that you understand how exactly are you supposed to pay yourself in your business. As always, while I am an attorney, I'm not your attorney and this is not official legal advice. However, I hope that it's helpful educational information to help you and modern online business owner get legally legit. So let's get into it. So you're making money in your business and you want to know, how can I pay myself? How can I make sure that I get to have some of that business money without getting into trouble? It's a great question. Our first rule that we want to have is you need to be keeping separate accounts for your business money versus your personal money. The number one mistake that I see most new entrepreneurs making, even seasoned entrepreneurs if I'm being honest, is commingling your money. And this means that we only have one account and we're throwing all of the business and personal money into that pot. The problem with this is it's very difficult to distinguish what money is coming in into your business, and it's very difficult to track your expenses. And ideally, if you have set up as a limited liability company, one of the number one rules is that you have to keep the money separate to have that liability protection. You definitely don't want to be piercing the corporate veil or making holes in your business fence. And the number one way that people do that is by mixing money. So we're going to be really clean about our money. We're going to use separate accounts, and we're going to use actual payment processing for our business, make sure that you're using something like Square or PayPal or Venmo Business, any other kind of payment processing software that's actually going to give you protection as a merchant. Because you're a real business owner, you need to treat it like a real business. And yes, that does mean that you're going to have to pay credit card processing fees, but that's just the cost of doing business. Rule number 2: if it's time to pay ourselves money, whether we have a little money to give ourselves or a lot of money, the 2 really easy ways to do it are to either write yourself a check, literally write a check from your business account to your personal account, and you can put on there profit distribution, owner's draw, owner's compensation, or you can do a bank transfer. I would use similar language in the memo. That way, if you're doing your own bookkeeping, or if you have someone else who's helping you with your bookkeeping, you're making it really clear what this infusion of cash is supposed to be, and you can keep it really clean on your books. Our next rule is that if we have set up a business, or even if we haven't, we want to make sure we understand how we're going to get paid. Now it's time to consult my handy-dandy chart here. Now I know, I know you guys are saying you missed your calling as a graphic designer, Brit. I know, but bear with me here. So you're running your business and maybe you set up an LLC, maybe you haven't. And if you haven't, you are a sole proprietor. You are the same thing as a single-member LLC. The IRS actually doesn't see you any differently. They're like, you are the same to us. We don't really care. You just figure out your business. You're in kind of a special thing where you are the business. There's no legal separation between you and your money. And it means that you have not taken an S-corp election. So if you're over here and you make some money, you know that these are business owners because they're carrying phones and they have money. They do not dream of labor, they dream of taking a nap. So if you have money coming in here, you're an LLC or a sole proprietor. If you've done nothing, then guess what? You're a sole proprietor. It's the default. That money is all personal income, and you will report that on your Schedule C on your taxes. It's more than $600. They assume that you do not have a hobby, that you are probably making some sort of business. You can have businesses that take a loss, but you can only do that for so many years, and then the IRS is starting to get skeptical that that might not be a real business. I've seen a huge myth going around that if you set yourself up as an LLC, you avoid some sort of taxation, or that if you stay as a sole prop, you don't have to pay as many taxes. That's not true. As you can see here, IRS doesn't care. You are the same. And yes, all of that money that you make will be subject to self-employment tax. I know, does that suck to be an entrepreneur and to pay self-employment tax? It does. So let's talk about how we can avoid that. The second situation that you can set up is you have your brand LLC, and for this one, you do have to be an LLC, okay? You have set up your LLC and you have said, IRS, I declare— it's not like Michael Scott declaring bankruptcy, it's a real form you have to file— I would like to declare myself as an S corp. You might have heard about S corp and you're like, do I need to be an LLC versus an S corp? Here's a tricky thing. The answer is yes, because an S corp is an LLC that is electing to be taxed differently. And how are they electing to be taxed differently? Let me show you. You get money from your business, your LLC is taxed as an S corp because you filed that form and you've told the IRS, I would like to be taxed as an S corp. And Then we have a separation. You pay some of that money to yourself as a reasonable salary, and you have to run payroll. That's a very important point. You have to run payroll. I like using Gusto. That's what I use in my business, and that's what I recommend to all my clients. You find links below. But it needs to be a reasonable salary. What's a reasonable salary? That's a really good question that a lot of CPAs and tax attorneys can argue about. Work with your CPA to look at your industry. How much work are you putting into it? How much money are you making? What's a reasonable salary for where you live and what you're doing? Because you want to make sure you can defend it if you had to. And then the rest of the money you are going to give to yourself as a dividend. Here's the kicker: no self-employment tax. That is how you save money on taxes. You can imagine that people try to make this as small as possible so they can have most of their money come through here because it's going to be taxed at a much lower rate, saving them some moolah. But again, it needs to be a reasonable salary. Don't fudge this, okay? It's not worth getting audited and getting in trouble and having to pay back taxes. So that is how an S-corp can save you money. If you want this setup, there's some things you have to do. First of all, you need to form an LLC. I don't really like any form filing companies, any third-party companies. I recommend you do it on your own or you hire an attorney and work with that. After you do that, you're gonna need to set up payroll. And that does mean that there's gonna be some other employer-type things you have to set up. You have to make sure that you either are paying into unemployment tax or doing an exemption. It depends on your state law. It means that there's gonna be some admin costs, because running payroll costs money., and you have to pay into FICA taxes and payroll taxes, which is why if you are making under around $50K a year, this is not saving you money yet, and people don't switch to an S corp. However, that depends a lot on what tax bracket you're in, what are your other assets, are you married to someone who's making a lot more money? And so it is a question that you should bring to your accountant of, am I ready to switch? Is it time for me to differentiate from my business and to be in this category? Here are the rest of the rules to make sure that we're doing this correctly. If you have the setup of number 1, we want to make sure that even if it's pass-through taxation, that these are separate accounts because you can still have an active LLC and protect and shield your other assets. This means home, bank account, what you own with your spouse, retirement accounts, whatnot. But to have that LLC be in place, the money needs to be separate. No commingling of your assets unless you're on the dance floor. When you start making around $50K a year, okay, not an exact science, that's normally when you should be raising the question to your accountant or your attorney, should we switch to an S corp? I am not my business. I am working for my business., and I'm making sure I'm reaping the tax savings from that. I hope that was helpful in walking through all this. If you have any questions, let me know below. I love answering your questions and making sure I can be a resource to you. I'm your favorite online business attorney, Brittany Ratelle. Make sure you like and subscribe and don't miss any of my videos to help get you legally legit. Thanks so much for being here.
