Starting an LLC is all about running a business to make money. But when your customers pay, the money usually goes into your LLC’s bank account, not your personal one. So, how do you pay yourself from an LLC? Well, it all depends on how you’ve set up your LLC.
An LLC is a unique business structure that offers protection from personal liability, and it has a tax arrangement similar to a sole proprietorship. To understand how to pay yourself, you need to grasp the tax side of things in your LLC. Let’s explore this further.
How Is Your LLC Taxed?
LLCs have a unique feature when it comes to taxes: you get to choose how your company gets taxed. By default, if you’re the sole owner of the LLC, it’s taxed like a sole proprietorship. If there are multiple owners, it’s treated as a partnership.
But here’s the interesting part: you can decide to go a different route and opt for corporate taxation. To make this change, you need to fill out a specific form called an “election” and submit it to the IRS. Then comes the decision: Do you want your LLC to be taxed as an S corporation or a C corporation? This choice not only impacts how your profits are taxed but also affects how you can pay yourself from the LLC.
How You Can Pay Yourself From A Single Member LLC
In the realm of a single-member LLC, the path to paying yourself is relatively straightforward. As the sole proprietor, you have the privilege of reaping all the profits generated by your business. If your company rakes in $100,000, you have the liberty to claim the entirety of this sum – $100,000 – as your own.
The flexibility extends further; you can choose to receive your earnings in one lump sum or opt for periodic distributions. To initiate these distributions, a simple act suffices: write yourself a check directly from the LLC’s business bank account. However, it’s imperative to maintain meticulous records. Each withdrawal must be duly recorded as an “owner’s draw” in your financial books, thereby reducing your owner’s equity account.
A crucial point to note is that when it comes to tax time, all profits earned by your single-member LLC must be accounted for, not solely the draws you’ve taken. These earnings find their place on Schedule C of your personal tax return. Furthermore, as the captain of your own ship, you’ll bear the responsibility of self-employment taxes, ensuring compliance with tax regulations on the draws you’ve made.
How You Can Pay Yourself from an LLC Taxed as a Partnership
In a multi-member LLC, paying the members can be a bit complicated. Here’s how you can pay yourself from an LLC that’s taxed like a partnership. Think of it like this: Imagine your LLC has two members, and each owns half of the business, so it’s a 50-50 split. If the business makes $100,000, it’s pretty straightforward – each member gets $50,000.
But here’s the tax part. If you don’t choose to be taxed as a corporation, your multi-member LLC is automatically treated as a partnership. The twist is that the partnership doesn’t pay taxes itself. Instead, you have to file a form called “Form 1065” with the IRS, and this form is just for reporting – the LLC doesn’t pay taxes directly.
Now, for individual members, taxes get a bit more complex. You have to report your share of the LLC’s profits on your personal tax return, specifically on “Schedule C.” Also, you’ll need to deal with self-employment taxes, which are important when you’re in an LLC with partnership taxation.
How You Can Pay Yourself from an LLC Taxed as a Corporation
When your LLC is taxed like a corporation, your method of paying yourself changes. Instead of taking profits directly from the LLC, you receive a salary as an employee of the LLC.
To do this, you’ll start by filling out a W-4 form, which establishes you as an employee. This allows you to give yourself a salary, and you’ll get a W-2 for taxes. However, you need to be actively involved in the LLC’s operations to qualify for this.
If your LLC has multiple active members, either everyone gets a salary or no one does to maintain fairness. Your salary is treated as an expense for the LLC, deducted from profits. But it must be reasonable for your role based on industry norms, following IRS rules.
How to Pay Yourself from an LLC: Conclusion
The path to compensation in the realm of LLC ownership is not only possible but highly customizable. As an LLC owner, you hold the reins, whether to pay yourself or not. However, even if you opt not to receive direct payments, the taxman still cometh, and your profits must be duly reported on your Schedule C, with accompanying tax obligations.
Should you choose the route of payment, a prudent approach involves meticulous calculation and diligent financial record-keeping. Determining the ideal compensation amount demands attention to detail, aligning with both your financial needs and the fiscal health of your LLC.
In this intricate landscape, it’s not unwise to seek the counsel of a tax professional. Their expertise can illuminate the path forward, guiding your choices on LLC taxation and the quantum of your compensation. In this arena, knowledge is power, and professional guidance can be the beacon that ensures financial success within your LLC journey.
How to Pay Yourself from an LLC: Frequently Asked Questions
How can I pay myself from my LLC?
You can pay yourself from your LLC in various ways, such as taking a salary as an employee, receiving owner’s draws, or distributing profits as a shareholder, depending on your LLC’s tax structure and your role within the company.
Can I choose not to pay myself from my LLC?
Yes, you have the option not to pay yourself directly from your LLC. However, you may still need to report your share of profits for tax purposes, even if you don’t receive the money.
Are there tax implications when paying myself from an LLC?
Yes, there are tax implications. The method you choose to pay yourself can affect your tax liability. Salary payments may have income tax and employment tax withholding, while owner’s draws and profit distributions may be subject to different tax treatment.
How do I determine how much to pay myself from my LLC?
The amount you pay yourself should align with your financial needs and the financial health of your LLC. It’s essential to strike a balance that ensures both personal sustainability and the well-being of your business.
Should I seek professional advice when deciding how to pay myself from my LLC?
It’s highly advisable to consult with a tax professional or financial advisor. They can help you navigate the complexities of LLC taxation, and compensation strategies, and ensure that you make informed decisions that benefit both you and your business.