If you’re a small business owner operating as a limited liability company (LLC), you may be wondering how to pay yourself from the company’s profits. This is an important consideration because, as an LLC owner, you are not an employee and therefore cannot receive a traditional paycheck. Instead, you’ll need to find other ways to pay yourself while complying with tax laws and avoiding any legal issues. In this article, we’ll explore some common methods for paying yourself as an LLC owner.
- Determine your LLC’s tax structure Before we dive into the different ways you can pay yourself from an LLC, it’s important to understand how your LLC is taxed. There are four tax classifications for LLCs:
- Single-member LLC: This means the LLC has only one owner, and the LLC’s income is reported on the owner’s personal tax return.
- Partnership LLC: This means the LLC has two or more owners, and the LLC’s income is passed through to each owner’s personal tax return.
- S Corporation LLC: This means the LLC has elected to be treated as an S corporation for tax purposes. This allows the LLC to avoid paying taxes at the corporate level, and instead, the income is passed through to the owners’ personal tax returns.
- C Corporation LLC: This means the LLC has elected to be treated as a C corporation for tax purposes. This requires the LLC to pay taxes at the corporate level and the owners to pay taxes on any dividends they receive.
Understanding your LLC’s tax structure is crucial because it will impact how you can pay yourself and what taxes you’ll need to pay.
- Take guaranteed payments One way to pay yourself as an LLC owner is to take guaranteed payments. These are payments made to the owner(s) that are not considered wages or distributions. Guaranteed payments are typically made on a regular schedule, such as monthly or quarterly, and are treated as a business expense on the LLC’s tax return. The amount of the guaranteed payment is deducted from the LLC’s profits, reducing the LLC’s taxable income.
It’s important to note that guaranteed payments are subject to self-employment tax, which is currently 15.3% (12.4% for Social Security tax and 2.9% for Medicare tax) on the first $142,800 of income for 2021. If your guaranteed payments exceed $142,800, you’ll only be subject to the Medicare tax portion of the self-employment tax.
- Take a distribution Another way to pay yourself from an LLC is to take a distribution. This is a payment made to the owner(s) that represents a portion of the LLC’s profits. Distributions are not subject to self-employment tax because they are considered a return on investment rather than compensation for services rendered.
It’s important to note that taking a distribution should only be done if the LLC has enough profits to cover the distribution. Otherwise, taking a distribution could be seen as an illegal withdrawal of funds from the LLC.
- Set up an owner’s draw account An owner’s draw account is a separate account set up by the LLC to track payments made to the owner(s). This can be a convenient way to pay yourself because you can transfer money from the LLC’s bank account to the owner’s draw account as needed. However, it’s important to keep accurate records of these transactions and to only withdraw funds that the LLC can afford.
- Pay yourself a salary If you have elected to be treated as an S corporation or C corporation for tax purposes, you can pay yourself a salary as an employee of the LLC. This means you’ll receive a regular paycheck and the LLC will withhold taxes from your pay, just like any other employer. The salary you pay yourself should be reasonable and based on your role and responsibilities within the LLC. It’s important to note that paying yourself a salary can be more complicated than taking guaranteed payments or distributions, as you’ll need to comply with payroll tax laws and withhold taxes from your own paycheck.
- Consider fringe benefits If your LLC is treated as an S corporation, you may be able to take advantage of certain fringe benefits as an employee of the LLC. This can include health insurance premiums, retirement plan contributions, and other benefits. These fringe benefits are tax-deductible for the LLC and can provide additional compensation to you as the owner.
- Consult with a tax professional Paying yourself from an LLC can be complicated, and it’s important to make sure you’re complying with tax laws and avoiding any legal issues. Consult with a tax professional who can help you understand your LLC’s tax structure and provide guidance on the best way to pay yourself based on your specific situation.
Also Read : How to Pay Yourself ? : Owner’s Draw vs. Salary.
In conclusion, there are several ways to pay yourself as an LLC owner, including guaranteed payments, distributions, owner’s draw accounts, salaries, and fringe benefits. It’s important to understand your LLC’s tax structure and to consult with Aenten tax professional to ensure you’re complying with tax laws and avoiding any legal issues. By taking the time to properly pay yourself from your LLC, you can ensure the financial success of both yourself and your business.