Part of an ongoing series of accounting lessons for small businesses and freelancers.
How do I deal with the money I pay employees and freelance contractors who work for me? Are they all considered “payroll”? And what about paying myself? Here are some considerations to help you sort things out.
1. Full- and part-time employees are normally accounted for in your payroll expense.
2. Casual wages (like a one-day employee) can also be handled under payroll, but the general rule of thumb calls for putting hired contractors into an account that represents what they did for you. For instance, the cost of a short-term marketing assistant goes into a Marketing expense.
3. Paying yourself is a little more complicated. If you are in a proprietorship or partnership, when you take money out of your business it is considered an Owner Drawing in the accounting process. One consequence of this is that Owner Drawings, unlike Payroll, don’t reduce your business’ income tax. For instance, if your company earns $100,000, and you pay yourself $50,000, your company is still responsible for the taxes on $100,000. For this kind of business, the owner is responsible for the tax liability of the business regardless of the amount of money they pay themselves.
4. Paying yourself if you’re incorporated is even more tricky. You can treat yourself as a normal employee, but special accounting rules may apply. You could also pay yourself a management fee, or through dividends. In any case, you should consult your local and federal regulations or an accounting professional. This can be complex stuff and we couldn’t possibly cover it adequately here.
To make sure you’re doing things right, please get advice from accounting professional in your jurisdiction. With Wave, the easiest way to do that is to invite your accountant or advisor to be a guest collaborator. You can give them view-only access (they’ll be a fly on the wall and can tell you if you need to adjust something, but they won’t be able to make changes themselves) or edit access (they’ll be able to roll their sleeves up and adjust things themselves). In both cases, you can turn off their access when you no longer need the help. Working with guest collaborators is free in Wave — there’s no charge for you or for them.
The information and tips we’re sharing in this article are meant to be a starting point for your year-end tax prep, so you can be informed and feel confident when working with your accountant. Be sure to check with a tax expert in your country or region for any specific advice you need, as each business (and tax district) is different. As our lawyers would say: “This article is for informational purposes only. It should not be considered legal or financial advice.”