by Sarah | Jul 31, 2026 | Small Business Accounting
Determining how to pay yourself as an LLC owner is a decision that needs some definition.
Let’s take a look at an example. Judy is an LLC owner who moves $4,000 from her business account to her personal account on the first of every month and classifies it as her salary. The money is legitimately hers, her business is profitable, and nothing about her routine looks like a problem. When tax season rolled around, she learned that none of her transfers were treated as payroll. There were no withholdings from any of the transfers. She also learned she owed several thousand dollars in taxes that she had not set aside.
Her actions were honest. She described her draw as a salary, which changes the tax treatment and when taxes are due.
If that sounds familiar, learn how your LLC is taxed before you decide how to pay yourself so you know which options are available to you.
Your LLC is a legal structure, not a tax structure
Forming an LLC gives you liability protection at the state level. The designation doesn’t determine how the IRS treats your income. There are three common tax classifications for most small businesses.
An LLC With a Single-Owner is Taxed as a Sole Proprietorship
The IRS treats a single-member LLC as a disregarded entity. Your business income and expenses are reported on Schedule C of your personal Form 1040. You report the LLC’s profit on your personal income tax return; the LLC itself does not pay federal income tax.
You are the owner, not an employee.
An LLC With Multi-Owners is Taxed as a Partnership
When you add multiple owners, the LLC files Form 1065 and issues a K-1 for each owner’s share, which they then report on their personal returns. The business doesn’t pay income tax in the company name, and the owners are not employees.
Partnerships can include a feature called guaranteed payment. This is a fixed amount paid to a partner for services performed and is owed whether or not the business earns a profit. It is reported on the partner’s K-1. The guaranteed payment must be written in the partnership agreement or the IRS will not allow it.
An LLC Taxed as an S Corporation
An S Corporation is not a different kind of company. It is a federal tax election you file with the IRS (Form 2553), and your LLC remains an LLC under state law. The election reclassifies owners who work in the business as employees of the company, creating obligations not included in the other business structures.
This shift makes owners employees and creates obligations the other two structures don’t impose.
What Is A Draw?
An owner’s draw is cash withdrawn for personal use; it reduces the owner’s equity balance. Because the owner is not an employee, no payroll taxes are withheld, and no W-2 gets issued. On your books, the draw reduces your owner’s equity, which is your accumulated stake in the company.
A draw is not a deductible business expense; you’re taxed on the business’s earnings, not what you withdraw.
For 2026, that self-employment tax rate is 15.3%, made up of 12.4% for Social Security up to the wage base and 2.9% from Medicare with no cap. You pay it through your quarterly estimated payments in April, June, September, and January. If you decide to pay yourself with a draw, a good practice is to set aside 25% to 30% of profit as you earn it to cover taxes.
What is a Salary?
A salary means you are on the payroll as a W-2 employee of your own company. Federal income tax, State income tax, Social Security, and Medicare come out of every check you receive. The business submits its share of payroll taxes, files quarterly Form 941s, and issues year-end W-2s. Wages and employer payroll taxes are deductible business expenses that lower the company’s reported profits.
Which one applies to you?
Single-member and multi-member LLCs taking the default treatment (disregarded entity) pay their owners through draws. Guaranteed payments in a partnership are fixed and predictable, not treated as payroll, and remain subject to self-employment taxes.
When you become an S Corp, owners must pay themselves reasonable compensation as a W-2 salary subject to normal payroll taxes. Owner distributions beyond salary are not subject to self-employment taxes but do count as income. Some owners get themselves in trouble when determining their reasonable salary. Paying yourself $12,000 in salary and taking $138,000 in distributions is the kind of split that attracts the IRS’s attention.
Common Mistakes Made
When business owners determine how to pay themselves, we see several common mistakes:
- Running draws through payroll software without proper coding. Drawing cash coded as wages inflates your payroll expense and understates your profit. Any draws must be coded as an owner draw if your system allows it. No payroll taxes are collected on the owner draws.
- Recording draws as an expense. Draws belong in an equity account rather than on the profit and loss statement. When used as an expense, the business looks less profitable than it is, which becomes an obstacle when you are applying for financing or credit.
- Taking no salary after electing S corp status. When an owner elects S-corp status, they must pay themselves a reasonable salary. Not taking one can trigger an audit.
- Skipping estimated payments. If you skip estimated payments, underpayment penalties build each quarter.
Bookkeeping Habits
Once you have decided on your entity type and tax election, you need clean bookkeeping and a routine for setting money aside. Owners who know which bucket every transfer belongs in tend to have less stressful tax filing seasons and accurate financial statements. Gaining this clarity is worth more than the hour it takes to set up things correctly.
If you are not sure how to pay yourself within your LLC, let’s talk. Contact SAP Virtual Resources today!
by Sarah | Jul 15, 2026 | Small Business Accounting
It isn’t unusual for business owners to receive requests to pay an employee in cash. Clearly explaining the legal and practical aspects helps build trust and transparency, making them feel informed and confident in their decisions.
You Can Legally Pay An Employee In Cash
Paying employees in cash is legal in every state, including Wyoming. There is no federal or state law requiring compensation to be made by check or direct deposit. Cash is simply another form of payment, and the IRS treats it the same as any other.
However, many business owners find that legal doesn’t mean simple, which can make them feel cautious about maintaining compliance with all requirements.
What Doesn’t Change With A Cash Payment
Choosing to pay an employee in cash does not eliminate any of your obligations as an employer. You still need to:
- Comply with all withholding requirements.
- Accurately report and pay the employer’s portion of payroll taxes.
- Report wages correctly on quarterly and annual filings.
- Carry proper workers’ compensation coverage.
- Track hours for anyone classified as non-exempt.
- Issue a W-2 at year-end.
The method of payment may change. The compliance requirements do not.
The Real Cost of Cash Payroll
Paying employees in cash tends to add work rather than remove it. Your payroll software automatically handles the paper trail when paying by check or direct deposit.
Every cash payment needs its own paper trail. The documentation should include the date, amount, hours covered, and employee signature to confirm receipt. A check or direct deposit provides that proof in your bank statements and payroll registers. Cash payments require creating documentation one payment at a time.
This causes more recordkeeping.
Is It Worth It?
For most businesses, the answer is no. The appeal of cash usually comes from a false impression. The idea is that it avoids taxes or paperwork. What it actually does is trade an automated, well-documented process for a manual one that carries more risk and more of your time.
There are a few narrow situations where cash would make sense, such as a one-time payment to a day laborer who is properly classified as a contractor rather than an employee. Sound cash payroll documentation would be required. Your systems are built around checks and direct deposit.
What Should You Do If An Employee Requests Cash Payment?
Start by understanding why an employee is requesting a cash payment. Sometimes an employee doesn’t have a bank account or needs help setting up direct deposit. Other times, they are hoping to avoid withholding taxes altogether, which you cannot legally do for them, regardless of the payment method.
Explain that wages are subject to the same tax and reporting requirements regardless of how they are paid.
Whatever the reason, keep your payroll process consistent across your team and document each cash payment from the beginning to ensure compliance and avoid having to reconstruct later.
Maintain a Compliant Payroll Process
Payroll compliance gets complicated fast. Small mistakes can turn into costly problems to correct. If you are dealing with a request like this or need help with your payroll setup, processing, or reporting, contact SAP Virtual Resources for a free consultation to see how we can help.
by Sarah | Jun 3, 2026 | Payroll
Qualified tips need to be set up correctly in payroll now, because waiting until year-end is how small payroll problems turn into January W-2 headaches.
Eligible workers and self-employed individuals may be able to claim a $25,000 federal income tax deduction for qualified tips.
What Are Qualified Tips?
Qualified tips are generally voluntary tips paid by customers in cash or cash-equivalent form. This can include:
- Cash tips
- Credit card tips
- Debit card tips
- Tips paid through certain electronic payment apps
- Tips received through a valid tip-sharing arrangement
The key word is voluntary.
If a customer chooses the amount, it may qualify. If the business automatically adds a service charge with no option for the customer to change or decline it, that amount is generally not treated as a qualified tip.
For example, a customer leaving a $20 tip on a restaurant bill is different from an automatic 18% service charge added to a large party. The first may be a qualified tip. The second may be treated differently for tax reporting purposes.
Why This Matters for 2026 W-2s
Qualified tips must be reported separately on employee tax forms.
Payroll systems need to be ready to track more than just “tips” as a single bucket.
Employers may need to know:
- Employee-reported tips
- Tips paid through the business
- Tips came through tip-sharing arrangements
- Amounts that are service charges instead of voluntary tips
- Which employees are in tipped occupations listed by the IRS
- Which Treasury Tipped Occupation Code applies
Don’t wait to sort tips out after December 31.
Tips Are Still Payroll Wages
One of the biggest misunderstandings around “No Tax on Tips” is the idea that tips are no longer taxable at all.
The new rule creates a possible federal income tax deduction for eligible workers. It does not erase the employer’s payroll responsibilities.
Tips are still generally subject to Social Security and Medicare taxes when an employee receives $20 or more in tips during the month. Employers still need to include reported tips in payroll, withhold the proper taxes when required, deposit payroll taxes, and report those amounts correctly.
The deduction may help the employee when they file their tax return, but the employer still needs clean payroll records.
Start With Your Payroll Categories
If your business has tipped employees, this is a good time to review how your payroll system is set up.
Separate payroll categories might include:
- Employee reported direct cash tips
- Credit card tips paid through payroll
- Tip pool distributions
- Non-qualified service charges
- Allocated tips, if applicable
- Qualified tips for W-2 reporting
Every payroll platform handles this a little differently, so do not assume the default “tips” category is enough. Now is a good time to check your payroll settings, talk with your payroll provider, and make sure your categories are mapped correctly for W-2 reporting.
Review Service Charges Separately
Tips received through automatic charges for large parties, events, delivery orders, banquets, private services, or group appointments may appear to employees as tips. Still, they may not qualify as tips under the new rules.
If the customer does not have the option to decide the amount, change it, or decline it, the amount may be treated as a service charge rather than a qualified tip.
Service charges may need to be tracked and reported differently from voluntary tips.
A clean setup now can help prevent those amounts from being lumped into the wrong payroll category.
Make Sure Employee Occupations Are Correct
The IRS final regulations include a list of tipped occupations grouped by Treasury Tipped Occupation Codes. These codes are important because the employee’s qualifying occupation helps determine whether the employee’s tips are eligible for the deduction.
The categories may include food and beverage service, entertainment and events, hospitality, home services, personal services, personal appearance and wellness, recreation and instruction, and transportation and delivery.
Review job titles and payroll records now to ensure employees are classified correctly. If you have multiple types of workers, such as servers, bartenders, bussers, cooks, and managers in restaurants, or stylists, assistants, and front-desk staff in salons, it is an important step.
The goal is not to overcomplicate payroll. The goal is to avoid having to guess later.
Ask Employees to Keep Reporting Tips Properly
If employees receive cash tips directly from customers, they should continue to report those tips to keep payroll records accurate. Unreported tips can create problems for employees at tax time and may affect the accuracy of their W-2.
Implementing a written procedure for reporting tips ensures your entire team remains aligned and compliant.
Why Now Is the Best Time to Clean This Up
Waiting until W-2 season to fix tip reporting is like waiting until April to organize a year’s worth of receipts.
Technically possible, but nobody is having fun.
Setting up qualified tips in payroll now can help you:
- Reduce year-end payroll corrections
- Give employees more accurate tax information
- Separate voluntary tips from service charges
- Track tip pools more clearly
- Prepare for updated W-2 reporting
- Avoid scrambling during the January payroll season
A little setup now can save a lot of cleanup later.
If you are not sure whether your tip reporting is set up correctly, SAP Virtual Resources can help you review your payroll process, clean up your records, and make sure your business is better prepared for year-end reporting.
Book a consultation today!
by Sarah | Apr 15, 2026 | Small Business Accounting
Out-of-state employers find Wyoming’s Unemployment Insurance and Workers’ Comp to be confusing because the process looks streamlined at first glance. When you do business in multiple states, it is easy to assume payroll and insurance rules will follow a familiar pattern. Then Wyoming has to make things interesting.
Wyoming offers one portal, which does not mean one rule.
Why Wyoming workers’ comp catches out-of-state employers off guard
The topics of workers’ comp and UI are confusing because Wyoming handles things differently from many states. Wyoming is a monopolistic workers’ compensation state, which means most employers that need workers’ comp coverage in Wyoming must obtain it through the Wyoming Department of Workforce Services’ Workers’ Compensation Division. You can not use a private national workers’ comp carrier.
This requirement tends to be the first surprise.
Since only four states (North Dakota, Ohio, Washington, and Wyoming) operate their systems this way, many businesses assume their national workers’ comp coverage will automatically cover every state. When Wyoming workers’ comp coverage is required, the state fund is generally the primary provider.
This is one of those moments where Wyoming politely, but firmly says, “We do things our own way here.”
The filing process adds to the confusion
Another hurdle in working with Wyoming’s UI and Workers’ comp system is the filing process.
Wyoming tells employers to create an account through the Wyoming Department of Workforce Services (WYUI). If both UI and workers’ compensation apply to the business, this account may cover both filings. You will also use this account to report wages and submit workers’ compensation payments.
Unemployment Insurance and Workers’ Comp are handled through the same system, but they are still separate obligations. The portal combines the two, but the rules are not the same.
Out-of-State employers have an extra step
Another headache for out-of-state employers is that Wyoming requires businesses performing work in Wyoming or hiring a Wyoming resident to register with the Department of Workforce Services so the state can determine which coverage and reporting apply. You must complete an out-of-state questionnaire as part of the process.
Wyoming reserves the right to assign the highest base unemployment insurance rate of 8.5% to out-of-state employers who fail to complete the registration process before submitting their report.
If you wait to “deal with it later,” it can become more expensive than expected.
Combined reports do not mean fewer details
Wyoming’s requirement of combined reporting sounds easier than it feels in real life for some out-of-state employers.
Wyoming provides a UI or UI/WC Summary Report option, and employers can also file quarterly summary reports electronically through WYUI.
Out-of-state employers still need to know:
- Whether workers’ comp applies to their business in Wyoming
- Does state coverage apply rather than relying on private coverage
- Whether they completed the required out-of-state registration steps
- Which wages belong in which reporting buckets
The process stops being a simple data-entry project and becomes about understanding the rules before you submit.
Wyoming workers’ comp details employers should not overlook
Wyoming does not require reporting wages for officers, members, sole proprietors, or partners under workers’ compensation because those individuals are generally not covered unless coverage is elected. Wyoming also says its coverage does not replace the legal requirements of another state where your employees may be working.
You must apply Wyoming’s rules correctly, although they do not automatically ensure compliance in another state.
If your team is working across state lines, this is not an area where “close enough” is a strong payroll philosophy.
Takeaway for out-of-state employers
If your business is expanding into Wyoming, hiring a Wyoming resident, or sending employees into the state for work, do not assume your usual UI and workers’ comp setup and payroll process will transfer neatly.
Wyoming workers’ comp rules are confusing because the state uses a:
- Combined reporting system
- Requires additional registration steps for out-of-state employers
- Generally requires workers’ comp coverage through the state fund
It does not have to be overwhelming. It just needs to be handled intentionally before payroll runs. Don’t make a decision based on a guess.
Cleaning something up is often harder than setting it up correctly the first time.
If you need additional help understanding the Wyoming UI and Workers’ Comp rules, I can help you through the process. Let’s schedule a consultation to ensure you are compliant.
by Sarah | Dec 15, 2025 | Tax
In 2025, there will be changes to qualified tips and overtime that will affect payroll tracking and W-2 preparation, and employers must understand them. The rules are more straightforward than they first appeared, but preparation is still necessary.
To stay compliant and support your employees as they claim the new tax benefits, here’s what you need to know.
No Special W-2 Reporting for Qualified Tips in 2025
When early versions of the One Big Beautiful Bill were introduced, employers were told they would have to report qualified tips and qualified overtime separately on the W-2.
That rule did not make it into the final law.
This means:
- No new boxes on the W-2
- No separate reporting categories
- No additional year-end payroll burden
The extra reporting requirement has been removed to keep the process simple for small business owners.
However, this doesn’t mean employers can ignore the new rules, and you will need to have adequate systems in place for accurate reporting beginning January 1, 2026.
Employers Must Still Track Qualified Tips Internally
Even without special W-2 reporting, employers must track qualified tips inside their payroll system. Employees will rely on accurate employer records when claiming their new deductions on their 2025 tax return.
To be considered qualified, tips must come from specific types of work.
What Counts As Qualified Tips?
The IRS uses a very clear standard:
Qualified tips must come from occupations that “customarily and regularly” received tips on or before December 31, 2024.
Establishing a cutoff date prevents employers from creating new tipped roles simply to take advantage of the tax benefit.
Occupations that typically qualify include:
- Servers
- Bartenders
- Hairstylists
- Nail Technicians
- Massage therapists
- Hotel bell staff
Tips that do not qualify include:
- Tips from roles created after 12/31/24
- Service charges or automatic gratuities
- Mandatory fees
- Tip pool payments to employees who were not historically tipped
- Tips in positions without a pre-2025 tipping history
If the occupation did not regularly receive tips before the cutoff date, those tips are not qualified.
How Qualified Overtime Works
Qualified overtime follows the same rules as qualified tips.
Employers must:
- Track overtime separately
- Confirm the employee’s role qualifies
- Maintain clear payroll records
Again, these amounts are not separately reported on the W-2. However, they must be available for employee tax filings.
What Employers Should Do Now To Prepare
When you begin preparation now, you will be in great shape come tax time. Use these tips to get started.
- Confirm the job roles that qualify.
Document every position that regularly received tips before December 31, 2024.
- Update your internal payroll categories.
Internal records must clearly show regular wages, tips, and overtime.
- Educate your managers and staff.
Help them understand which tips qualify and why accurate reporting matters.
- Review your time and payroll systems.
Make sure they can track qualified tips and overtime correctly.
- Keep clean, accessible records.
Employees may not be aware of the changes and will rely on your documentation when filing their 2025 tax returns.
Why Tracking Qualified Tips And Overtime Matters
Qualified tips and overtime can provide meaningful tax benefits for employees. When employers track these amounts correctly, workers receive the full benefit they’re entitled to.
Good preparation also protects employers from mistakes, confusion, and follow-up questions during tax season.
If you want someone who understands the details and can help you stay organized, contact me today for year-end support that keeps your business running smoothly.
