Starting a business can be exciting and rewarding, but it also requires managing the financial aspects of your company. As a business owner, it's important to pay yourself for the work you do. But understanding how to pay yourself from an LLC can be confusing.
In this blog post, I discuss the ways in which LLC owners can pay themselves, the tax implications of each method, and the steps you need to follow to ensure you're doing it correctly.
Single Member LLC - Draw or Distribution Method
The most common method for LLC owners to pay themselves is through the draw or distribution method. This method involves taking money out of the business account without paying employment taxes on the money.
Essentially, the money you take out is considered an owner's draw or owner's distribution and is counted as income on your personal taxes.
You simply write yourself a check, keep track of it for tax time, and then you’ll report it at the end of the year on Schedule C of your personal tax return. And when you do pay taxes, you’ll pay both your personal and company portion of FICA and other employment taxes.
Multi-Member LLC - Draw or Distribution Method
For a multi-member LLC with two or more members – think owners – the LLC members also pay themselves through the owner’s draw method. The members can each draw as much or as little of their shares as they choose, as long as sufficient funds remain on hand for day-to-day business expenses and growth.
The multi-member LLC generally files a Form 1065 informational return and provides a K-1 partnership statement to the members. Each member is responsible for paying their personal tax liability and the company portion of employment taxes.
All LLC's - Guaranteed Payment Method
The third method that LLC owners can utilize to pay themselves is the guaranteed payment method. This method involves receiving a predetermined payment for services you provide to the company. This payment is considered a business expense and is deducted as such from the company's profit.
However, you will still pay self-employment taxes on the payment on your personal taxes. To use this method, make sure that there is a written or digital agreement that outlines how much you will be paid and the services that you will perform for your LLC.
LLC’s Taxed as a Corporation - Salary Method
For an LLC that has elected to be taxed as a corporation like an S-corporation or a C corporation, members don't take owner’s draws. Instead, they’re considered employees and must pay themselves a set "reasonable" salary on the company’s regular payroll with taxes withheld.
The salary is subject to both income and self-employment taxes, just like any other employee. But any profits left over at the end of the year can be distributed to the members with no personal or company employment tax liability. So, you can save 15.3 percent.
To pay yourself via this method, you need to establish a payroll system and remit payroll taxes to the IRS. It's essential that you meet the IRS regulations, guidelines, and filing deadlines for your specific state.
A Word of Caution - Piercing the Corporate Veil
It's important to note that LLCs have limitations that protect their owners from personal liability for the business's debts and obligations. However, by co-mingling personal and business finances, you run the risk of piercing the corporate veil and losing this protection. To avoid this risk, it's essential to keep all business and personal finances separate and maintain records of all financial transactions.
Final Thoughts
LLC owners have several options for paying themselves, each with their own tax implications and specific steps to follow. The most important thing is to ensure you understand the rules and regulations on how to pay yourself from an LLC and keep accurate records to avoid running into issues with the IRS.
By taking these steps, you can help ensure that your business stays on the right track and that you are compensated for your work as an owner and employee of your LLC.
To your success,
