How to Pay Yourself From an LLC

Octavia Conner

By Octavia Conner

Tags: All, Virtual CFO, Maximize Profits, Strategy

 

As the owner of a limited liability company, also known as an LLC, it can be a little complicated to determine the best way to pay yourself.

You must factor in if your business is a single-member LLC or multi-member LLC. In addition, you have to determine if you will file as an employee of the company or not.

 

When paying yourself as the LLC owner, you want to make sure your payment methods fit within the IRS guidelines. Your compensation method is essential when it comes to filing your taxes.

Before identifying your compensation method, you must first determine your LLC structure.

 

In the episode below, I dive deep into everything you need to know to receive compensation as the owner of an LLC.

 

 

When paying yourself as the LLC owner, you want to make sure your payment methods fit within the IRS guidelines. Your compensation method is essential when it comes to filing your taxes.

Before identifying your compensation method, you must first determine your LLC structure.

 

You can either be a single-member LLC, which you will then be considered a sole proprietorship at the federal level.

Or you can have two or more owners, which you will then be a multi-member LLC. And in this case, you will either form a partnership or a corporation.

 

If you become a partnership or a corporation, you must understand that they are taxed differently; therefore, you are paid uniquely as the owners.

 

Let's break down each structure.

 

How to Pay Yourself as A Single Member LLC

 

As the owner of a single-member LLC, you compensate yourself via the owner's draw. 

 

As a single-member LLC, you are a "disregarded entity". As this relates to taxes, your additional income outside of the business and your firm's profits are the same. Therefore, you will file your business income and expenses on Schedule C of your tax return. This information will then transfer over to Form 1040

 

How A Single Member LLC Completes an Owner's Draw

 

There are two methods to complete an owner's draw.

  1. You can write a check to yourself from the business. You will then deposit that check into your personal account.
  2. You can make a transfer from the business to your personal account.

Inside of your accounting system, this payment will appear on your Balance Sheet under the Owner's Equity

 

I KNOW YOU MAY BE WONDERING HOW DOES THIS AFFECT YOUR TAXES

 

How A Single Member LLC Is Taxed

 

A single-member LLC is taxed based on its net profit. For example, if the company earned $200,000 for the year and the expenses were $190,000, the remaining net profit is $10,000. 

 

That $10,000 is subject to self-employment taxes which, as of today, is 15.3%. Therefore, you will be responsible for paying $1,530 to the IRS in self-employment taxes.

 

How to Pay Yourself as A Multi-Member LLC

 

As the owners of a multi-member LLC, your compensation method will depend on if you are a partnership or corporation. 

 

As a partnership LLC, each owner can take an owner's draw based on their shares.

 

How A Partnership LLC Is Taxed

 

When it's time to file your taxes, the partnership will file an IRS Form 1065. The LLC partnership is treated as a "pass-through" entity. Therefore, the company is not taxed. The tax responsibility flows to the owners, and it's based on their shares.  

 

When the partnership files Form 1065, each owner will receive a Schedule K-1. The owner's shares of the company will show on a Schedule K-1.

 

Each owner is then responsible for paying 15.3% of their shares in taxes. Please note that even if you don't take your full share in owner's draw throughout the year, you will still be responsible for paying taxes on the total amount.

 

For example, if you own 50% of the company's shares but only take 25% in owner's draw, you will still be required to pay taxes on the full 50%. 

 

How to Pay Yourself as An LLC Corporation

 

Shareholders of an LLC Corporation cannot be paid via an owner's draw. 

 

If the company is structured as an S Corporation or C Corporation, the owners must be hired as employees and receive "reasonable compensation." 

 

Each owner can also receive dividends which are payments they receive outside of their wages.

 

How A Corporation LLC Is Taxed

 

The owner's salary is subject to payroll taxes based on how they complete their W2. The dividends they receive are not subject to payroll taxes. 

 

When receiving dividends from the company, you never want your dividends to exceed your annual salary. This can lead to additional troubles with the IRS.

 

Also, if the company is an S Corporation, it is considered a "pass-through" entity; therefore, there are no taxes levied at the corporate level. Each owner will receive a K-1. 

 

If the company is a C Corporation, it will be double taxed. Meaning, the company will be responsible for corporation income taxes, and everyone who earns wages or dividends from the corporation will pay personal taxes on their earnings. 

 

CEO Next Best Steps

 

The best way to pay yourself as an LLC is to leave a money trail. As a corporation LLC, you must receive a salary. However, if you are taking owner's draws, I highly recommend you write a check to yourself from the business.

 

Also, regardless of your business structure, you want to build a business that can cover a reasonable CEO salary, pay all its additional monthly expenses, AND generate a profit on top of that. With our virtual CFO services for consultants, we help you understand which business structure is best for your growing firm, and how to correctly pay yourself.  

 

If you need assistance with determining and processing your CEO salary, visit our website and schedule a Discovery Session today.

 

Apply For A Discovery Session Today!

 

 

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