How to Pay Yourself as an LLC
< View All PostsAn LLC, corporations, partnerships, and a sole proprietorship are all different types of business legal structures with unique methods of formation, liability, and taxation. A limited liability company, or LLC, is a popular type of legal entity that can be granted to a business since, an LLC combines attributes from a sole proprietorship and a corporation. Choosing to become an LLC means your business protects you from any personal liability, but you don’t need to jump through the same hoops as a corporation since any reported profit is considered personal income instead of business income.
Due to this grey area, those who are looking to start a business may be wondering how to pay yourself as an LLC. Depending on what type of LLC you form, the rules can vary. In this article, we discuss how to pay yourself as an LLC based on what type of LLC you opt into for your business.
What Are the Different Types of LLC?
Even though an LLC is considered a unique business structure, the status can take on different identities for tax purposes. An LLC is a common business entity choice because of its simplicity and the ability to take advantage of its hybrid nature. Starting an LLC let’s you gain the same limited liability as a corporation while being much less expensive to form and operate.
Even with all its benefits, payroll may be a confusing concept for those used to corporations. New business owners may need to learn how to navigate paying yourself correctly when you’re the owner.
LLCs are known as “pass-through” entities for tax purposes. This is because revenue is taxed as private income, resulting in lower rates. LLCs have adaptable tax status that allows you to be federally taxed as a different entity depending on your needs. Generally, paying yourself as an LLC is a fairly simple process, but the rules change slightly depending on if you’ve established a single-member, multi-member, or corporate LLC.
Single-Member LLC
A business with only one person, this type will typically just be viewed as a sole proprietorship for tax purposes. In this instance, the owner and business are the same since your profits are just viewed as personal income.
How does a single-member LLC pay themselves? Instead of a traditional salary, the owner pays themself through an owner’s draw. You essentially just write yourself a check from your business account as frequently and as much as you want, although it’s advised to leave some money behind for business operation costs. Remember to always write yourself a check, as opposed to cash, to keep an accurate paper trail of profits and losses to cover yourself in the event of any errors.
Multi-Member LLC
A multi-member LLC is usually referred to as a partnership and can include two or more people. Similarly, to single-member LLCs, each individual member reports their profits as personal income, and the IRS won’t tax the business itself.
How does payment work for multi-member LLCs? Partnerships can use owner’s draw just like single-member LLCs, where the profits can be split however the partnership determines. Just like single-member LLCs, the owners take payment through an owner’s draw.
Taxes on Owner’s Draws
How are owner’s draws taxed? As either a single-member LLC or multi-member LLC, you would owe income tax on all profits made regardless of whether you drew all of it or not, as well as social security and Medicare taxes.
When you make a draw, no taxes are being withheld at the time. Members may be required to make quarterly estimated income tax payments on income earned. If there are no tax payments made throughout the year, you will have to pay all your taxes when you file your tax return, possibly with penalties. Which can be overwhelming and difficult to budget for some. You should always consult with an accountant for more information about what specific tax forms are needed for your LLC.
Corporate LLC
LLC can elect to be classified as an S-Corporation or C-Corporation for tax purposes. When the election is made the members are now known as shareholders.
So how is payment as LLC that elects S-corporation or C-Corporation different? Instead of using the owner’s draw method, the LLC owners pay themselves a set salary just like a traditional employee. The active shareholders receive wages subject to tax withholdings.
Take careful consideration as you figure out what to pay yourself, as there are requirements set by the IRS you will need to keep in mind. Do your research to determine what is reasonable compensation for employees in similar occupations as yours. This might be a reasonable option for your business if you have consistent income flowing. Other things you need to consider include dividends, which means you would be paying yourself a percentage of business profits, or essentially another form of income to report.
Learn How to Pay Yourself as an LLC and More with Eco-fyle
If you’re ready to start doing what you love, let us handle the busy work. Eco-fyle provides a fast and easy way to start a business by allowing the experts to handle the legal documentation. Our goal is to aid individuals with the legal complexities of starting a business with our user-friendly platform.
Now that your small business is growing, it’s important to protect both your company and your own assets. Forming an LLC can help do that. Is it the best business entity choice for you? We’ve written a complete guide to form an LLC to help with your decision. Contact us today to get started.
