After you’ve formed an LLC, running your business becomes a little more complicated than if you were earning money as an individual by providing goods or services.
To make matters even more complicated, the IRS provides you with a few options for how to pay yourself.
In this guide, we’ll show you how to pay yourself from an LLC, including your options, how to pick the best one for you, and how to make payments to stay on top of taxes.
Here are the four primary ways your LLC can pay you.
1. You Must Pay Yourself as a W-2 Employee
Many LLC owners believe that treating yourself as an employee is the most advantageous way to receive payment.
In this arrangement, you—along with other owners who actively work in the business—are employees/owners, and you receive paychecks just like any other employee.
As long as your business generates enough revenue to cover your salary or wages consistently, this can be a good way to set yourself up with predictable pay for your household.
You must pay yourself “reasonable compensation,” according to the IRS. The IRS does not specify an amount; it simply needs to be a reasonable amount for someone doing your job.
If you pay yourself in this manner, you can elect to be taxed as an S-corporation. The benefit is that you only pay FICA, Medicare, and Social Security taxes on the salary or wages you pay yourself, not on all business profits. That’s a 15% tax break on some of your earnings.
2. Profit Distributions Earned
Profit distributions or owner’s draws can be paid to an LLC member (a.k.a. shareholder). This entails distributing business profits to owners.
If you’re part of a multimember LLC, the process is more complicated, but for a single-member LLC, it’s very similar to how you’d pay yourself as a freelancer. You receive money and deposit it into your personal bank account.
Your operating agreement for a multimember LLC specifies how and when profits will be distributed.
The disadvantage of using this as your primary payment method is that you will have to pay self-employment taxes on all money coming into your business rather than just a set salary.
If your business is your primary source of income, you may prefer to pay yourself a salary as an employee and take an owner’s draw on any extra profits.
3. Reimburse Yourself as a 1099 Independent Contractor
Technically, you can pay yourself as an independent contractor rather than an employee of the company, but this isn’t always advantageous for most small businesses.
When you pay yourself as a contractor, you avoid having to deduct payroll taxes from your paycheck, and your personal account receives your full payment as it would with any other contractor. However, you rarely save money in this manner.
When you pay quarterly taxes as an independent contractor, you pay the same amount as self-employment tax rather than payroll taxes from your paycheck.
This method may also be complicated because you must file taxes as both the LLC owner and as a contractor.
It may make sense if you are a shareholder in an LLC for which you do not actively work and want to provide occasional services, but it is not a common approach if you own and operate your LLC.
4. Keep The Funds In The Company
Read more:-
- The Trial of Former Trump Adviser Steve Bannon is Expected to Begin Soon
- The Cost Commissioner Was Suspended Following Claims of Sexual Harassment Made by a Women Officer.
- U.s. Senator Luján Joins Colleagues in Asking the Internal Revenue Service to Extend the Filing Deadline for Individual Taxpayers Identification Number (Itin) Applicants Affected by Processing Delays
The final option is not to pay yourself at all. You might do this if you want to reinvest profits in the business rather than in your own pocket, or if you want to save money in the business.
Even if you don’t receive a paycheck or distribution, you must pay income taxes on any profit generated by the business. Tax authorities treat LLCs as pass-through entities by default, so profits are taxable to you. (The company does not pay any additional tax on them.)
Be cautious if you’ve chosen S-corp tax treatment. If the business generates little revenue, not paying yourself may pass the “reasonable compensation” test. However, you can’t usually leave money in the business to avoid paying self-employment taxes—doing so could cost you in fees and back taxes later on.
