Q: I own a small restaurant, 2011 is the first year of actual activity. I don't know how to pay myself for the hours I spend there at the restaurant. Am I suppost to treat myself like one of my employees? That would mean having social security and income tax withheld from myself or do I make member draws to pay my personal bills?
A: How you declare income for yourself will depend on the tax structure of the business....
The general rules of how you take out money are as follows:
If you are a sole proprietor (or an LLC filing as a sole proprietor) you declare the net profit of the business as calculated on a Schedule C as your income which you will then pay Social Security, Medicare, and income tax on (self employment taxes). In this case you may need to make estimated tax deposits during the year.
If you are a regular C corporation you pay yourself a wage subject to social security and income tax as you take it out of the business and file quarterly 941 employer tax returns.
If you are an S corporation you take part of your money out as a wage similar to a C corporation but then can take part of it as a distribution which is not subject to Social Security and Medicare taxes.