You started a business, you worked like crazy, and now it’s finally time to pay yourself for all the hard work. That’s awesome, but where do you find these payments on your financial statements?
The treatment of owner’s pay is determined by the structure of the business.
Single-member LLC (sole proprietor) or a partnership:
Payments to the owner(s) do not show up on the profit and loss statement, but instead are recorded in the equity section of the balance sheet. When you take money out of your business to pay yourself, it is not considered an expense. Likewise, it is also not considered income when you put money into the business for capital.
S Corporation (and LLCs that elect this tax treatment):
Payments to the owner(s) in and S Corp are often treated in a few different ways. In a corporation, you must pay yourselves a “reasonable wage,” which means that part of your pay will be your wage (subject to tax withholding), and part of your pay will be a distribution (not subject to withholding). Wages will be recorded on the income statement as an expense, while distributions will be recorded in the equity section of the balance sheet.
Payments to the owner(s) are considered wages and will be recorded in the expense section of the income statement.
If you want an accurate picture of how well the business is doing after your owner’s pay is included, I would suggest you use the cash flow statement along with the profit and loss statement. The cash flow statement includes the information on the profit and loss statement plus any balance sheet transactions (such as payments on loans and owner’s pay). This statement will give you the best answer about how your business is doing!