I am often asked the question, why is my business profit so high? I don’t have that much money in the bank. The follow up question is then; do I really have to pay taxes on this paper profit? The answer is typically, yes, this is your taxable income.
Many small business owners don’t realize that taking money from the business for personal use, is not considered a business expense.
Business expenses are expenses incurred while carrying out normal business operations to make business revenues. These expenses are what you call tax benefits.
Using money from the business, to pay your car note, rent, lease or cover your personal wellness is classified as a distribution. A distribution from the business is not a business expenses but money taken out of the business by the owner for personal use. These withdrawals or distributions reduces your equity in the business and is fully taxable at the end of the year.
To avoid, the pitfall of high year-end tax liability or reduction in Owner’s Equity, you may want to consider setting up a reasonable payroll for yourself as the business owner. Start by calculating the actual cost required to cover living expenses. You may then want to compare that to what you actually deduct from the business monthly and settle on a reasonable salary.
Your next step would be to get in touch with your accountant or find a payroll provider to set-up your payroll.
Don’t be afraid of being compliant and running your business the right way. You may find that you will start enjoying tax refunds rather than having to owe taxes. Specialists Accounting can setup your payroll and prepare your taxes so you can stop worrying and get the best advise for your business.