How To Pay Yourself When You Have An LLC
If you are a business owner, or are just starting up a business, then you may want to consider getting tax benefits and protection from personal liability by creating a Limited Liability Corporation, also known as an LLC.
LLCs allow business owners to be flexible with their ownership and management, so they are something to consider. However, creating an LLC means that working out how to pay yourself becomes less simple.
In this article, we will discuss all of the ways you can pay yourself through an LLC. There are a few ways to do it, so be sure to read the full article so you can make an informed decision on how to do it!
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What Is An LLC?
LLC rules will change depending on the state, but generally, all owners of an LLC are referred to as LLC members.
To meet the qualifications for an LLC member, then you need to be a corporation, an individual, or another type of LLC.
In comparison to regular corporations, LLCs are much easier to establish and result in a lot more flexibility when it comes to tax. For example, LLCs can choose between their employees listing the losses and profits of the company on their personal tax returns, or paying taxes as a business.
When compared to sole proprietorships, LLCs are similar, but a sole proprietorship will not provide a business with liability protection and only has one owner.
Are There Different Types Of LLCs?
Yes! There are different types of LLCs. Every classification of LLC has a different set of implications for tax, and rules. Let’s check out some different types of LLCs!
Single Member LLC
With a single-member LLC, there is only one owner. The sole owner has responsibility for the transactions of the company, as well as its debts and taxes. As far as LLCs go, this is the easiest to establish, as well as the cheapest.
With this type of LLC, the responsibility for debt and taxes is spread between many partners in the business. Sometimes these partners have complete liability, which is the case with the Limited partnership.
General partnerships are the type of LLC that those in both small and medium-sized companies prefer. This type of LLC is simply a business agreement set up between two individuals.
Typically, the way the different types of LLCs are taxed will be different. For example, single LLCs are taxed the same way as sole proprietors, while multi-member LLCs are taxed the same way as corporations and partnerships.
Members of the LLCs will be paid in different ways depending on taxes.
How Can You Pay Yourself Via An LLC?
If you are a small business owner, then you have two options when it comes to paying yourself with an LLC. The first is by taking an owner’s draw. The second is by paying yourself a salary.
Whatever way you choose will affect your personal and business taxes.
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Taking An Owner’s Draw
As the owner of a business, if you take money out of the business for your personal use, this is called the owner’s draw. If you have chosen to create a single-member LLC, this is the method you will pay yourself with.
Additionally, because you are a single-member LLC you will be considered a disregarded entity. So, the IRS will consider you and your company to be the same thing, and the taxes from the company will pass to you and will be reported on your tax return.
To pay yourself, you will need to write a check to your personal account from your LLC account. Then, when it comes to doing your taxes, there is no need to file separate ones.
Multi-Member LLC And The Owner’s Draw
Other types of LLCs, aside from single LLCs, have the option for owners to take an owner’s draw as a method of payment.
Since the IRS sees multi-member LLCs the same way they see Partnerships. Therefore, Partnerships can be considered pass-through entities.
As a pass-through entity, your income will be reported to the IRS, but the partnership itself will not be taxed. Instead, each partner will pay their fair share of the tax based on the total revenue of the company. The amount each partner pays will be decided on and the agreement will be written beforehand.
All partners must pay their income tax in full for their profit shares even if they do not take an owner’s draw of the earnings. Parents will all receive their share of the earnings of the company on the IRS Schedule K-1 form.
Partners will not be subject to income tax once they take money from the company, but they will then be subject to tax for self-employment.
How Can You Pay Yourself As An Employee?
If your LLC is going to be taxed as a corporation, then you will not be able to take an owner’s draw. However, you can hire yourself as an employee and put yourself on the payroll of the company.
When it comes to dividend payouts, then you will not benefit from favourable taxation. But, hiring yourself as an employee can be a pretty clever move. By doing so, you will generate a W-2 form, and this form can be useful when you need to apply for loans like car loans, your mortgage, etc.
Here, your social security, income tax, and Medicare will be withheld from your paychecks. You can also choose to give yourself a salaried wage.
In terms of taxes, the wages of an employee are considered to be an operating expense. So, they will be taken away from the profits of the company.
Additionally, you may be able to hire yourself as an independent contractor instead. Here, you can pay taxes for self-employment. Choosing to do this or paying yourself as an employee will depend on the Common Law Rules of the IRS.
For example, if you do work that is vital to your business, then you need to pay yourself as though you are an employee. If you have specilaized skills that are only necessary depending on the project, then you should hire yourself as a contractor and pay yourself accordingly.
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How To Pay A Salary From A Multi-Member LLC
If all LLC members contribute to the company’s operations, then they must all be paid a salary. If only one member manages the company, then only that manager will need salaried payments.
How Much Should You Pay Yourself?
If you are using the owner’s draw method of paying yourself, then you can take money for yourself whenever you want. However, you must keep a record of every withdrawal to make sure your taxes remain organized.
As for salaried pay, you will receive your payment in terms of both your paycheck and your dividends. No matter if you choose to pay dividends to yourself or choose not to, you will still need to pay yourself a salary within reason. Here, your salary will need to cover your annual expenses at least.
You can pay yourself when you have an LLC in two different ways, the owner’s draw or a regular salary. The way you pay yourself depends on which type of LLC you have.
We hope this article tells you all you need to know about LLCs and paying yourself.
Your check stubs can be used as part of tracking your finances. Use them along with your credit card statements so you can have a better understanding of incomings and outgoings.