Running a Proprietorship: Can I Pay Myself a Salary Legally?

I am running a proprietorship firm, which has about 8 employees. Can I withdraw some salary in my name, or is it not allowed?

Yes, but I think it cannot be shown as an expense for the purpose of tax deduction under the Income Tax Act because the earnings of the firm and its sole proprietor are treated as one.

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The business belongs to you can do what you want with the money. So if you want to give yourself a salary, that is okay and your choice. But whether you give it to yourself as a salary or as drawings, it will be the same. From a tax point of view, it will be a non-allowable expense and considered as a part of profit withdrawn from the business.

Why do you say it's better not to take a salary.

If you need regular money for personal expenses, it makes good business sense to factor it in as a salary and take that much home. It's then a part of operating cost in the business. Of course, instead you can draw whatever you need instead of salary.

The point we all made was from a tax point of view, it makes no difference whether you draw a salary or not.

Yes, as a director, you have to draw your salary every month. Like other employees, there should be a bank account (salary account) for the director. The director also has some roles and responsibilities and should be compensated for them. The director should enjoy all the benefits given to employees.

I don't think a proprietor will be considered as a director drawing a salary. Of course, the proprietor is entitled to out-of-pocket expenses, entertainment expenses, etc., and drawings for personal or domestic use. However, drawings alone cannot be treated as expenses of the firm, as all drawings will be accounted for in the proprietor's capital account, not in the profit and loss account, treating them as expenses of the firm.

My suggestions are, instead of 'as salary,' you may draw money from the firm as 'drawings' and account for various expenses that you incur as expenses such as staff welfare, repair and maintenance, vehicle running and maintenance expenses, business promotion, travel/local conveyance expenses, stationery, upkeep of buildings, etc., depending on the nature of payment based on the bills you could attach. This type of treatment might solve your query.