One of the common questions new limited liability company (LLC) owners have is — how do I get paid from my business?
The good news is that you have at least three options.
But the less great one is that each one requires you to think about company cash flow, other members’ share, and the number of employees (if any).
In this guide, we explain in simpler terms how to pay yourself from your LLC if you report taxes as a sole proprietor, partnership, or S-corporation.
Whenever there is money involved, there are always tax implications!
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How to pay yourself from an LLC: 3 scenarios
LLC profit distribution is regulated by federal authorities.
By default, if you’re the only owner of an LLC, the IRS treats you as a sole proprietorship for tax purposes. Single-member LLCs are disregarded entities to the IRS, so you’d report the business income and expenses on Schedule C of your personal tax return.
A multi-member LLC has a default tax treatment of a partnership. Each member reports their share of business income and expenses on their individual tax return form and pays applicable personal income and self-employment taxes.
Both can also elect to be taxed as an S-corp or C-corp instead.
In both cases, LLC members can then receive salary payments from their company and other non-dividend profit distribution. But C-cop status requires payment of corporate income taxes. So few small business owners go for this option.
Based on the above, you have three options to pay yourself from your LLC:
- Get an owner’s draw
- Issue a guaranteed payment
- Receive an employee wage
Let’s examine each one in detail.
Single-member LLC: Take an owner’s draw
Being taxed as a sole proprietor means you can withdraw money out of business for your personal use. It’s called an “owner’s draw,” where you pay yourself from your business based on the company’s profits.
Once you decide how much your personal draw will be, you can set up fixed monthly payments instead of transferring a lump sum once a year.
For example, if you decide that your owner’s draw will be $24,000, you can set up monthly payments or write checks to yourself for $2,000 every month. Or you can pay yourself $24K at once — your call.
No matter what you decide, you’ll have to report all your company profit and losses Schedule C on their personal income tax return first.
When it comes to taxes you pay:
- Personal income taxes all of the company’s profits, not just on the amount you’ve withdrawn.
- Self-employment for social security and Medicare on owner’s draw withdrawals made during the year.
What percentage should you pay yourself from your business?
Depending on the type of business you run, you can safely pay yourself 20%-30% of company profits.
The number, however, will be lower if you have employees (and don’t want to get in a situation where you can’t pay them because the business bank account is empty).
Similarly, it’s wise to pay yourself less if you want to reduce the tax bill. Review your personal expenses for the year as a starting point for annual personal income. Then consult with an accountant to figure out how to best distribute your earned money.
What if my LLC makes no money?
If your LLC hasn’t yet turned a profit, but you want to take draws, wages, or distributions, you’d have negative equity in the business. The hope is that you can resolve the negative equity as your business starts to make a profit in the future.
Request tax advice from CPA if you’re paying yourself from an LLC that’s not making any money to evaluate your income and expenses. Paying yourself in such a case can leave you short on cash and struggling to pay some other dues.
Multi-member LLC: Take an owner’s draw or use guaranteed payments
A multi-member LLC is taxed as a partnership by default. Partners are not considered employees and can’t receive a salary.
Instead, LLC owners can opt for an owner’s draw or guaranteed payment.
Similar to a sole proprietorship, a multi-member LLC can pay its members with an owner’s draw.
This payment is made to each member as their share of profits or an advance of future profits. For bookkeeping and tax purposes, the draw payments are not recorded business expenses.
Instead, they are marked as distributions of profit that impact the balance sheet only.
When tax time comes, each member will receive a Schedule K-1 detailing their share of the company’s profits and losses. The Schedule K-1 details are included as part of the members’ personal income tax returns.
Members can also receive guaranteed payments from the LLC. These payments are issued to members regardless of the company’s profits. That benefits members as they can count for this income even during unprofitable periods.
This, however, can have a bigger impact on business cash flow and is not recommended for startups struggling to turn a profit.
Whichever method you choose, make sure your LLC has an operating agreement to specify how profits, losses, and distributions (among other things) are made.
Many partnership disputes can be resolved or even avoided with an operating agreement in place.
Can a partner in an LLC draw a salary?
No. Because a partner in an LLC can’t be paid a salary. They can take draws or distributions on their share of earnings. The partner will pay self-employment and income taxes on their distributions.
Can an LLC pay a manager?
Yes, an LLC can pay compensation to a manager. If an LLC member manages the company, this person is entitled to a) management compensation b) distributions based on their ownership amount.
A non-member manager is considered an employee and should be paid as such. That means paying reasonable compensation and withholding payroll taxes as applicable.
You can, however, also appoint a non-member manager as an independent contractor if they are only involved on a temporary, per-need basis.
LLC taxed as a corporation: salary and profit distribution
You can also elect to tax your LLC as an S-corporation or C-Corporation. Doing so means that the members who actively participate in running the LLC can be considered employees and receive a salary.
Single and multi-member LLCs can elect S-corp status. That allows you to pay yourself a salary. Respectively, you’ll pay payroll taxes as an employee instead of paying self-employment taxes.
Employee wages are an operating expense and a tax deduction. So you can end up saving on taxes.
As a W-2 employee of your S-corporation, you can schedule yourself a salary at fixed intervals (monthly or bi-weekly). Federal and state tax payments are automatically withheld from your earnings.
Note: the amount you get paid must still be reasonable for your own business and industry per IRS guidelines.
Besides paying employee salaries, LLCs taxed as corporations can choose other profit distribution options.
C-corporation owners are called shareholders. Shareholders can receive compensation in the form of dividends in addition to salary. Members can elect to retain earnings in the business or distribute profits as dividends.
Note that C-corporations are subject to double taxation. The IRS taxes earnings at the corporate rate and again at the shareholder’s personal tax rate when earnings are distributed as dividends.
S-corporation tax class, on the other hand, allows you to pay members a salary, plus non-dividend-based distributions. Neither of these is subject to corporate income tax. The trick is that you can’t only pay yourself dividends — it must be a combination of both a salary and dividends.
Consult a CPA to determine how much your business can reasonably pay you without disrupting your cash flow.
Does an LLC file corporate tax returns?
Only if your LLC elects to be taxed as C-corp for federal tax purposes, doing so means that you’ll have to file a separate tax return, Form 1120.
It’s in addition to shareholders’ individual tax returns. An S-corporation election means you must file IRS Form 1120S, which reports the business activity. This information is then transferred to each members’ Schedule K-1 for their personal tax returns.
Even if your LLC has no income or activity, you must still file your individual and corporate tax returns.
You can pay yourself in different ways from your LLC. Whichever payment method you choose, ensure adequate documentation to prove your transactions.
If you decide to take an owner’s draw, writing a check from the LLC’s business account and depositing it into your personal account is an excellent way to keep a paper trail of activity in case of an audit.
If you fail to maintain documentation, it can be implied that there’s no separation between you and your LLC.
You may be found to be commingling business and personal funds. That means that if legal action is brought against your business, the personal liability protection that an LLC provides may be voided if your paperwork can’t establish your LLC as a separate business structure.
So stay on the good side of compliance and get yourself an accounting business app to help you with bookkeeping.