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  • Writer's pictureDominique Young

Mastering the Basics: How to Properly Report Earned Income

Let's just start off with the fact that every business has employees. For most small businesses, you, the owner of that business, are that one employee. If you read Profit First, you will see that many small business owners don't consider themselves employees of their business and don't compensate themselves accordingly. Many times the owners earn less than what they pay their employees to keep their business going. Often times, business owners don't even take home a paycheck from their business for the betterment of their business. Essentially a slave to their business. What Profit First teaches is that there is a better way. Based on where your business in the process described in the book, you as the owner take home Owner's Compensation. When you do implement Profit First and begin taking home Owner's Compensation, that entire amount is not just for you. Some of that money belongs to the IRS and the SSA for your later retirement. Here's how you can be compliant with your salary reporting once you begin taking home a paycheck from your business.

Reporting Employee Wages
  1. Make sure you have an EIN for your business. You get that from the IRS.

  2. Where ever you reside (not where your business resides), create an account with the State Department of Revenue to remit your state withholding taxes. If you live in any state that is not Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, you need to withhold state income taxes. The state department of revenue will give your business a state identification number for you to use in reporting every year.

  3. Complete a Form W-4 for yourself. This is the Employee Withholding Certificate.

  4. Every time you pay yourself, which could be weekly, bi-weekly, monthly, etc., withhold the appropriate tax for your salary and place it in your tax account. You can determine how much to withhold by going to Paycheck City to calculate your net income and what needs to be set aside for taxes from your gross income. Print the earnings report for later use and file away. The taxes for Federal withholding, Medicare, and SSI on the earning report go in the Tax account from the Owner's Compensation account and you pay yourself the net amount on the earnings report from the Owner's Compensation account.

  5. Every quarter, complete and file a Form 941, Employer's Quarterly Federal Tax Return. This is the form that reports to the IRS how much you paid yourself during the quarter and how much was set aside for withholding taxes. Submit the return with the withheld taxes to the IRS. You don't have to worry about whether you have this money because it is already saved in your Tax account.

  6. For state reporting, go to your state department of revenue and complete the quarterly return and pay the requisite taxes withheld. Again, this money is already saved in your Tax account.

Yearly Reporting

Every year in January, before you file your personal tax income tax return and preferably before you file your business' tax returns, complete the following forms:

  1. Your own W-2. You will enter your business' information and the gross amount you paid yourself along with the taxes your business withheld from your paycheck during the year.

  2. Your 1099-DIV. Profit First establishes profit for your business that you as the owner take a portion of every quarter. The money that you take as a profit are dividends, for a corporation, or distributions, for an LLC. This money is not considered wages thus taxes are not withheld when you pay yourself dividends/distributions. You still have to report that money as income though. The 1099-DIV informs the IRS of this income.

  3. A W-3. The W-3 reports to the IRS and the Social Security Administration how much you made gross and how much was withheld during the year.

  4. Send a copy of your W-2 with the W-3 to the IRS and SSA. File the 1099-DIV with the IRS.

  5. For state purposes, you would complete an annual withholding return and submit that to the state department of revenue.

Personal Reporting

The W-2 and 1099-DIV that you created from the income you reported is what you use on your personal income taxes, just as if you were employed by another business. Because that is what you own; a business. It's no different from being an employee of any other employer. Thus, you report it the same way. This step is if you file a separate return for your business and have been paying yourself a salary or hourly wages. If not, there is a separate process. You should see a tax preparer proficient in LLC reporting or an accountant for this part.

An Easier Way

If this seems like too much work and you can afford it, use online payroll software like Quickbooks Payroll, ADP, Gusto, SurePayroll, Freshbooks, Rippling, and Wave to do the reporting and calculating for you. The steps I gave above are if you don't have the resources to pay for the subscription or if the software does not fit in with your business' Profit First lifestyle.

Just know that you don't have to be a slave to your business. You can pay yourself a salary and have that be your source of income for IRS reporting purposes. You can use the income you receive from your business to get a mortgage, apply for a lease, finance a car, anything that a W-2 is usually required because you have created that W-2 based on the income you have paid yourself and reported to the IRS.


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