Employee Compensation

Salary, Wages, and Employee Benefits

If you are an employee of someone else's business, you do not pay compensation to another individual. You can skip most of this chapter and go on to look at deductible expenses. However, you might want to review the areas covered to understand your employer's burdens and responsibilities for the wages and benefits paid to you. You may also be interested in 2 tax credits to which you may be entitled by virtue of working.

If you are the owner of a sole proprietorship, partnership, or limited liability company, you are not an employee and cannot receive employee compensation. Money you take out of your business is a “draw,” but it is not a deductible expense for the business (you already pay tax on your share of business income, whether or not it is distributed to you). However, your business may have employees, and payments to them are deductible according to the rules discussed in this chapter. According to the Summer 2012 Statistics of Income Bulletin, wages and compensation was the largest deduction category for sole proprietorships. ...

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