How to Pay Yourself as a LLC Owner
Many people with an LLC ask us questions such as, “how do I pay myself in a single-member LLC?” Or “how do I pay myself in a multi-member LLC?” Both of these questions will be answered along with how you will be taxed. Having an LLC business is complicated when it comes to knowing how to pay yourself. And also sticking with the guidelines of the IRS. So let’s get right into it.
What is an LLC?
An LLC or a Limited Liability Company is a lightweight, hybrid structure. It combines some of the best features of a partnership and a corporation. Like corporations, every type of LLC provides limited protection against personal liability. Since LLCs are under state rule, for federal purposes, they are treated as a partnership or a corporation. All profits and losses of the business are reported on the owner’s personal income tax return. This is only if it is a single-member LLC. They are reported on every member’s personal income tax return if it is a multi-member LLC. This makes things less confusing.
What is a single-member LLC?
A single-member LLC is a type of business that only has one member. They are viewed as sole proprietorships by the IRS for tax purposes.
What is a multi-member LLC?
A multi-member LLC is a type of business that has more than two members. It is treated as a partnership for tax purposes by the IRS.
How do you pay yourself as an owner of a single member LLC?
When you are the owner of a single-member LLC, the IRS views you as “disregarded entities.” For tax purposes, the business and the owner are one in the same. This means that the LLC’s profits are considered personal income rather than business income. When being paid from an LLC as an owner, you do not receive a salary or wages. You pay yourself by taking money out of the LLC’s profits instead. You must leave enough money for everyday company expenses to help your company grow. That is called an “owner’s draw.” This means you can write yourself a check. You could also deposit money straight into your personal bank account from your LLC’s bank account. For tax purposes, make sure you keep records of everything.
How do you pay yourself as an owner of a multi-member LLC?
Since the multi-member LLC is treated as a partnership, you cannot pay yourself like you do a single-member LLC. All of the profits and losses are passed from the business to each member of the LLC. The members all put their losses and profits on their personal federal tax returns. Also, all owners of the partnership. It is only considered a partnership if there are two or more members.
As a partnership, they are regarded as “pass-through entities” by the IRS. This means that technically the business isn’t taxed even though the business income is reported to the IRS. All of the members keep their take of the profits as their personal income.
The members of the multi-member LLC can pay themselves through the draw method. Which is the same method that an owner can use in a single-member LLC. Each of them can withdraw however much they want of their share, They do need to leave sufficient funds for business growth though. This is reported as part of the Schedule K-1. If all the members opt for this draw method, then each member is required to pay taxes on any distributions. They need to pay these taxes on their personal tax return. The LLC would need to file the business return with the IRS. The LLC would need to state the amount of what each member was getting paid.
LLCs that are S corporations or C corporations, all of the members would need to be hired as employees. Everyone would need to earn salaries. The IRS would also need to confirm if the salary was reasonable or not. Financial reserves permit, these LLCs can set up guaranteed payments for members.
How are you taxed as an owner of a single-member LLC?
Since in most cases a single-member LLC is considered a pass-through entity. Any net income earned will be reported on your personal tax return. This means you will not be required to file a separate tax return. You will only be taxed on the end-of-the-year net income earned by your LLC. Once you get taxed on the net income, you will not be taxed on distribution for the whole year. Some states require taxes to be filled out for LLCs though. So make sure you look into that before the tax season starts.
How are you taxed as an owner of a multi-member LLC?
As a partnership, the LLC does not file its own business taxes. Each member files their percentage of the LLC’s losses and profits on their personal tax returns. Even if a member did not draw the entire amount, they still need to pay 100% of income tax. Along with paying those taxes, they need to pay self-employment tax. This is from the amounts that they drew for Medicare and Social Security. All multi-member LLCs are also required to file IRS Form 1065, and each member must file a Schedule K-1.
Bottom Line:
When owning an LLC, either a single-member or a multi-member, they both have a confusing way of payment. Paying within the company needs to be something consistent. Always make sure that you keep track of everything so you have all the information you need for taxes.
Written by Paige Rozell
Before joining Superior Trucking Payroll Service, Paige had served as a Hallmark store associate, children’s ministry administrative assistant, and members’ relations representative at a local credit union.
One day she hopes to go ‘across the pond’ to experience all the museums, castles, and wine country that France has to offer. She can’t wait to physically explore the home country of the Eiffel Tower, Notre Dame, and Champagne. Paige studied French in both high school and college and takes every chance she gets to learn more or collect France-related items.
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