Owning an LLC is a great way to limit your personal liability while doing business. It can also offer certain tax advantages for the members or owners of the LLC.
But how members are paid needs to follow certain guidelines and laws to avoid possible fines or worse. Below, we’ll go over all the key details of how to pay yourself as an LLC.
What Is an LLC?
An LLC, or Limited Liability Company, is essentially a type of business structure that offers unique flexibility. An LLC can be structured as a sole proprietorship or a single-member LLC. It can also be structured as a partnership or multi-member LLC. Finally, an LLC can even be structured and taxed as a corporation.
All of this is done while protecting the member’s assets from personal liability should the LLC be sued or a judgment made against it.
How to Pay Yourself if You Own an LLC?
If you are an LLC owner, you want to get paid when the company turns a profit. Below we’ll go over the different ways an owner can pay themselves with an LLC.
Single-Member LLCs (Owner’s Draw)
Single-member LLCs are seen by the Internal Revenue Service (IRS) as no different than the owner itself, at least for tax purposes. The term for this is a “disregarded entity” and it means the business’s profits are seen as personal income for the owner or members.
An owner’s draw is just a set amount of cash reserves that are withdrawn from the LLC to the owner. The amount can be anything the owner wants, the frequency can be whatever they want as well. All money drawn is reported on the owner’s income tax return.
For example, if you were the sole owner of an LLC, you could set up an owner’s draw that paid you a set amount of $5,000 per month from the business profits. The owner would then declare this $5,000 as income on their state and federal taxes.
All owner’s draw amounts do not need to have taxes withheld when paid because they are not technically a salary. Instead, the owners pay taxes on them when they file their personal tax returns. However, it’s good practice to make quarterly tax payments that are an estimated amount, and then finalize the true annual tax owed at tax time.
Generally, an owner should not draw all the money an LLC has and should leave an appropriate amount for operating expenses to maintain the business.
Multi-Member LLCs (Owner’s Draws & Guaranteed Payments)
Multi-member LLCs are taxed differently. Instead of being disregarded entities, they are considered pass-through entities by the IRS. Business income is reported, but the owners pay tax on the income after they take their agreed-upon owner’s draw.
For example, if an LLC has 3 members. Each member will have an owner’s draw amount that they have all agreed upon. Those individual members each then report that draw amount as personal income.
The LLC still reports the income it makes but pays no taxes. The individual owners pay taxes when they take their draw from the LLC. Each member has to pay taxes on the full amount of their agreed-upon profit share, even if they don’t take the full amount as a draw.
Members also must pay taxes for Social Security and Medicare, which are commonly referred to as the “self-employment tax”.
The amount of each draw does not have to be equal and the members decide on the amounts and frequency.
Corporate LLCs (Salary & Distributions)
Finally, a corporate LLC that is set up as an S corporation or C corporation is different from the previous two examples.
With a corporate LLC, the owners cannot take a draw as they are seen as shareholders. Instead, they must be paid as employees of the corporation. This means they receive a set salary with the usual federal and state deductions via a standard payroll setup.
In addition, owners of a corporate LLC can also be eligible for dividends to receive portions of the corporation’s profits. These extra payments do not have the standard payroll deductions applied but are still taxed as personal income.
It’s also important to note that as an employee of the corporation, you must pay yourself a “reasonable” salary as defined by the IRS. This means your salary must be comparable to the work you are performing and should be similar in compensation to other jobs in the field.
How Much Should You Pay Yourself From Your LLC?
Determining how much to pay yourself as an owner of an LLC is a common dilemma. Below, we’ll go over some tips to help you find the right amount to pay yourself.
With the owner’s draw, there is nothing wrong with taking a certain amount of the profit. The goal of a business is to make money, so drawing money for your own personal use is expected.
It should be an amount that makes sense both for the owner and for the business. This means it shouldn’t starve the business of needed money.
For example, if the LLC’s total profits for the month were $10,000, it wouldn’t be wise to draw the full $10,000. This would leave the business unable to pay its own expenses.
Also, if you take more than the business is worth or your share of the business, that can technically be a loan and adds a high degree of complexity to your financial situation.
Calculate a Reasonable Salary
To calculate a reasonable draw or salary, you want to forecast how much the business is going to be earning after expenses. You should have a record of past earnings and expenses to use as a guide.
Calculate expenses for the business that will need to be paid and deduct these from total profits. You will also want to consider any future expansion plans or reinvestment plans for the business and deduct these from what you plan on drawing.
For example, if you plan on expanding your LLC and will be needing new equipment like computers and office furniture, it’s wise to forecast these costs and deduct them before taking your draw.
If you are structured as a corporation, your salary needs to be seen as reasonable. This means if you are set up as an employee of the corporation and providing accounting services, your salary should be similar to accountants performing that same task.
This same rule applies to executives if they are established in the LLC operating agreement
Keep the Money in the Business
It’s very important to leave enough money in the business to cover all expenses. However, the business needs to grow as well. So this will include any expansion plans or plans for reinvestment.
This money should come from the LLC. You don’t want to draw all the money from the LLC and then pay for business expenses from personal income that you just took out. This sets up a troublesome accounting situation that may result in fines or penalties. It is also generally a poor tax strategy and in some cases may be a violation of the law if handled improperly.
Assistance With Your LLC Setup and Business Bookkeeping
If you need to set up an LLC or need bookkeeping assistance with your current LLC to handle an owner’s draw or other payment tissues, contact the business experts at doola.
We specialize in helping business owners and entrepreneurs leverage the full power of an LLC so they can enjoy all the benefits this structure provides.
Contact doola today and learn how we can help your limited liability company succeed.
Are you required to take a salary from an LLC?
No. Although you still have to pay taxes if you don’t draw the money. You are free to leave the money in the business though as either savings or to expand the business.
It’s important to note that if you take no salary as a corporate LLC, you may violate the IRS “reasonable compensation” clause. That clause can work both ways, both for a salary that is too high, or one that is too low.
Can a single-member LLC pay himself a salary?
No. Members cannot be employees of the company for single and multi-member LLCs. They instead usually take an owner’s draw.
What are the benefits of paying yourself through an LLC?
There are two main benefits. The first is paying yourself through an LLC may allow you to avoid certain taxes compared to standard distributions. Next, paying yourself through an LLC keeps your business and personal finances separate so you can enjoy the limited liability that an LLC offers.
Is it better to pay yourself a salary or dividends in an LLC?
This depends on your goals. Paying yourself as a salary might incur slightly higher personal taxes, although the corporation can file the employee salary as an expense, which lowers its tax burden. Dividends are generally paid to shareholders, and they can be taxed slightly lower than salary income. Dividends are also based on shares of ownership, so this may complicate the situation.
What is the most tax-efficient way to pay yourself?
Any way that you pay yourself you’ll be taxed. A dividend payment may yield a lower tax rate in some cases. Also, paying yourself as an employee does allow a corporate LLC to deduct that money as an expense from its total tax profile.