Income versus cash

Income versus cash

Cash is king. Don't leave it sitting in your business account! Source: https://www.flickr.com/photos/armydre2008/7714200766

Cash is king. Don't leave it sitting in your business account! Source: https://www.flickr.com/photos/armydre2008/7714200766

As an owner-employee, you focus on the cash coming out of your business account into your personal account. From a personal perspective, the money does not count until you can use it to settle your bills or put food on your table. You think of income in terms of the cash and what you do with it.

Remember, though, that we pay taxes on income, not cash. Leaving money in your business account will never keep you from having to pay income tax. Let’s look at an example:

Your single-owner business earns $50,000 in net revenues (less deductible expenses). Whether you elect treatment as a sole proprietorship or as an S Corporation, you report all $50,000 of income on your personal tax return, whether you left all $50,000 in the business bank account, transferred every cent to your personal account, or something in between.

Keeping excess cash in your business account—more than needed to cover business expenses and perhaps save to purchase a new business asset—prevents you from using that cash for valid personal reasons, such as paying off debt or saving toward a goal. Don't leave taxable income in your business account if you need that money!

Small business finance ABCs: Separate accounts

Small business finance ABCs: Separate accounts

Determining Salary and Distributions from Your S Corporation

Determining Salary and Distributions from Your S Corporation