Making sure everyone gets paid is an important part of operating any limited liability company (LLC). Regardless of whether you’re running a small business or a larger company, there are important legal guidelines and tax considerations to take into account. You’ll also need to decide which pay structure is best for your LLC and how you want to get paid.
How Do I Pay Myself From My LLC?
A common way to pay yourself as an LLC owner is by taking what is called a “draw.” A draw is simply when you take money out of your business account for your personal use. An owner’s draw can be done at any time and there is no set amount that you have to take out. The owner’s draw method is popular with single-member LLC businesses. Often, these LLCs are considered pass-through entities, meaning the business income is passed directly onto the LLC owners or investors. At tax time, the business income will be reported on your personal tax return with Schedule C instead of on a separate return for the business.
Wages and Salaries
Another way to pay yourself from your LLC is to take a salary or give yourself a wage. This is similar to how traditional employees are paid, and it can be a good option if you want to keep your personal bank account separate from your business bank account. To do this, you will need to add yourself to your payroll system and withhold taxes from your paycheck, just like you do for your employees. Your LLC will report your earnings as a deduction and you will pay income tax on the salary you receive. Keep in mind that the IRS will only allow what it considers to be a “reasonable salary” as a deduction for your LLC.
You can also consider counting yourself as an independent contractor for your LLC. This method means you will receive payments from the LLC just like any independent contractor would. Likewise, you won’t have to take payroll taxes out of your earnings but will still owe that amount in self-employment taxes when you file your personal tax return. Paying yourself with his method may be a good option if you are part of an LLC with more than one member where you are not very active, but is probably not the best option for single-member LLCs or situations where you have a leading role in business management.
Lastly, you can choose to pay yourself through distributions. This means that you will take money out of your business profits and pay taxes on that money as personal income. Often, the distribution method is used in multi-member LLC, pass-through entities where each member of the LLC receives a percentage of the company’s profits earned in a year. The amount each member of the LLC receives is usually defined in the operating agreement. In this situation, the LLC members each report how much of the profit they received when they file taxes and pay full income tax on that number. For a single-member LLC using the distribution method, business owners will still pay income taxes on the distribution amount they are owed and will also report the LLC’s profits and losses on their personal income taxes using Schedule C. You will also be required to pay self-employment taxes on your distribution.
Paying Yourself in a Single-Member LLC vs. Multi-Member LLC
As you can see above, an important factor to consider in how you pay yourself is whether you are part of a single-member LLC or a multi-member LLC. If you own a single-member LLC, then you may have more freedom in choosing how you get paid. A single-member LLC owner often elects to take a draw, which may be a more difficult system to manage with a multi-member LLC. If you are partnered with other people in a multi-member LLC, you may be required to take a salary or a distribution as these methods are easier to track among multiple LLC members.
No matter which method you choose, be sure to keep good records so that you can stay organized and compliant with all applicable laws.
Other Key Considerations
1099 vs. Payroll
If you opt for distribution or independent contractor payments, you must issue a 1099 for the money you receive. The 1099 methods are simpler than setting up payroll for yourself but can be trickier when it’s time to file your personal income tax return. You will also be required to pay self-employment tax when you file.
Establishing a payroll system and giving yourself a wage or a salary may require more setup and require you to withhold taxes from your pay, but can be beneficial in the long run. This is especially true for multi-member LLCs and may be an easier way for you to remain compliant.
The bottom line is that paying yourself through payroll is generally the best option if you have more than one LLC member. If you are the only LLC owner, then you can choose either payroll or a 1099 method, but payroll is almost always the safest option.
Setup & Licenses Required To Process Payroll
If you decide to pay yourself through payroll, then there are a few things that you will need to do in order to set up your system. First, you will need to obtain an Employer Identification Number (EIN) from the IRS. You can apply for this online, and it is free to obtain.
Once you have your EIN, you will need to set up a payroll system. This can be done through a number of different software programs, or you can outsource it to a third-party provider.
You will also need to obtain the necessary licenses and permits from your state in order to process payroll. Each state has different requirements, so be sure to check with your state’s labor department to find out what you need.
In addition to obtaining the necessary licenses and permits, you will also need to withhold certain employment taxes from your paycheck if you opt for the payroll method. The most common employment taxes withheld as payroll tax include federal income tax, Social Security tax, and Medicare tax. LLC owners should also be aware of self-employment taxes.
If you aren’t sure which taxes you need to withhold, it might be best to chat with an accountant or tax advisor. They can help you understand how to pay taxes that you owe and whether you are required to pay self-employment tax in your situation.
How Much Should You Pay Yourself as the Owner of the LLC?
There is no one-size-fits-all answer to this question and no average salary range that works for every LLC business owner. The amount that you pay yourself should be based on a number of factors, including LLC profits, the amount of money you need to live on, and the amount of money you want to reinvest back into the business.
As a general rule, you should pay yourself reasonable compensation to cover your living expenses and then reinvest the rest back into the business. This will help you to grow your LLC while still being able to cover your personal bills. Remember that if you are paying yourself a salary from the LLC, the IRS will only allow what it defines as a “reasonable salary.”
If you are unsure of how much to pay yourself, consult with an accountant or financial advisor. They will be able to help you determine the best way to structure your pay so that you can meet your business goals. A business advisor may also be able to help you manage your personal assets and expenses and help you make better financial decisions when running your own business.
How Do I Pay My Employees From My LLC?
If you have employees working for your LLC, then you will need to pay them through payroll. Just like paying yourself through payroll, you will need an EIN from the IRS, have access to a payroll system or third-party payroll service, and withhold the applicable taxes from your employees. Be sure to check federal and state guidelines to find out which employment taxes you need to withhold from your employees’ paychecks.
Choosing a payment structure for yourself and understanding the laws regarding how you pay employees can be confusing at first, especially if you are a small business owner. But by considering your LLC’s structure and the tax implications of each payment method, you can make an informed decision about your payment systems.
Create Your Business Plan in 1 Day!
Don’t you wish there was a faster, easier way to create a business plan for your LLC?
With Growthink’s Ultimate Business Plan Template you can create your business plan in 8 hours or less!