Paying yourself a salary: taking money from the cash box

Murat Abi's pocket and cash box

Murat Abi is a haulier. He works with his van; his money is in a drawer and in the bank. During the month he took 8,000 lira from the drawer for household costs. At the end of the month he told his mali müşavir (certified public accountant): "Record this 8,000 as salary." The accountant: "I can't." Murat Abi was surprised: "It's my money and my business; why can't what I take out be a salary?"

The answer depends on the type of business.

In a sole proprietorship: you and the business are the same person

In a sole proprietorship (şahıs işletmesi), the business is not a separate legal person; legally, you and the business are one and the same. Therefore:

• You cannot pay yourself a salary. The money you give yourself is not called a salary; under tax law, a salary the business owner pays themselves is not accepted as an expense (Income Tax Law, Gelir Vergisi Kanunu, art. 41/2).
• The money you take from the cash box for yourself is money you take out of the business's money for your personal needs. This is called "owner's drawings" (özel çekiş). The law says clearly that money the business owner withdraws from the business cannot be recorded as an expense (Income Tax Law art. 41/1).
• Tax is calculated not according to the money you withdraw, but according to the business's profit. Whether you withdraw money or not, the profit is the same.

So the 8,000 lira Murat Abi took out does not change the business's expenses, and it does not reduce its profit either. The money simply moved from the business's pocket into his own pocket.

This system also has an advantage: because you pay tax according to profit, taking a lot one month and a little another month does not change the tax. But if you take money out without any control, the cash runs out.

In a limited company: the company is a separate person

In a limited company (limited şirket) the situation is different. The company is a separate legal entity; as a partner, there are several different ways of taking money from it:

1. Salary (wage, ücret): If you actually work in the company, the company can pay you a salary. One point you need to know: limited company partners are generally insured in their own name under Bağ-Kur (4/b), the social security scheme for the self-employed, and cannot be registered by their own company like an ordinary employee (4/a) (Law No. 5510, art. 53). Always set up the tax, SGK (Social Security Institution) and payroll (bordro) side of the salary with your accountant.
2. Profit share (kâr payı): A profit share can only be distributed from the company's annual net profit and from accumulated profit set aside for this purpose (reserves, yedek akçe); the partners decide on it at the general meeting (genel kurul) (Turkish Commercial Code, Türk Ticaret Kanunu, TTK, art. 608). If there is no profit to distribute, there is no profit share either. Tax may also be deducted when a profit share is paid; ask your accountant about this.
3. Loan: If you take money from the company without it being a salary or a profit share, it is a debt you owe the company. It goes into the records as something like "receivables from partners" (ortaklardan alacak), and it has to be paid back. Be careful: the law restricts this. A partner who has not paid their capital contribution cannot borrow from the company, and neither can a partner of a company that has not been able to cover losses from previous years with its profit and reserves (TTK art. 358; for limited companies, art. 644). There is a penalty for a company manager who pays out money in breach of this rule. Even where it is allowed, the company may need to charge interest on this debt. Ask your accountant before taking any money out.

If these three routes get mixed up, a gap opens between the company's books and the real situation.

The consequences of mixing them up

• Cash disappears. Money taken from the cash box at random also eats into the money set aside for tax and SGK (see Setting money aside for tax (in Turkish)).
• The books and reality drift apart. Withdrawals with no clear purpose make your accountant's job harder, and make things harder for you in an inspection.
• In a limited company, an extra burden may arise. The tax consequences of a partner's debt or withdrawals should be discussed with your accountant; we are not giving a general ruling on this.
• The profit you think you have may not be profit. When the company's money and your own money get mixed up, the answer to "how much am I earning?" becomes blurred.

Sole proprietorship or limited company: a regular "drawing day"

When paying yourself, this habit helps:

1. Take the same amount every month, instead of taking more in a month when you earn a lot and nothing in a month when you earn little. Choose an amount the business can bear in weak months too.
2. Take it on the same day. For example, the 1st of the month.
3. First set money aside for the tax jar and your own Bağ-Kur premium, then look at the amount you withdraw.
4. Make a written note. When you took it, and how much.

This way, your household gets money regularly, and the business isn't caught off guard.

In a limited company, be careful: this regular amount is not taken from the company as you please. If you work in the company, it is set up as a salary through payroll; money taken without payroll becomes the partner's debt to the company and may run into the legal limit described above.

What should you tell your accountant?

"I take money from the business for myself every month. How will we record it, and what are the consequences for tax and SGK?" Both sole proprietors and limited company partners should ask this question. The answer depends on the type of business and your partnership structure.

Paying a salary in the name of your spouse or child?

Some employers think of paying a salary to their spouse or child to reduce tax. In a sole proprietorship, a salary you pay to your spouse and your minor children cannot by law be recorded as an expense (Income Tax Law art. 41/2). In a company the situation is different; real work and documents are needed. If you are thinking of something like this, ask your accountant beforehand.

Why does it matter to keep the accounts separate?

If you make your own spending and the business's spending from the same account, at the end of the month it becomes hard to tell which is which. A separate bank account for the business also simplifies "paying yourself": you make a regular transfer from the business account to your own account, and the record creates itself. For this, you can also look at the lesson Cash, bank and the money in your pocket (in Turkish).

In one sentence

In a sole proprietorship, the money you take from the cash box for yourself is owner's drawings, not a salary, and it is not recorded as an expense; in a limited company, salary, profit share and loan are separate things, each with its own rules.