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by Mike Vestil 

How To Pay Yourself From An LLC

Part of knowing how to start an LLC involves understanding how to pay yourself for your business.

The wrong way to pay yourself is to take cash out of the business whenever needed. Paying yourself this way can lead to tax complications and may even be illegal, depending on your state's LLC laws.

Instead, depending on your business type, there are better ways to consider. In this article, I'll look at how to pay yourself from an LLC correctly.

As part of understanding what is an LLC and the various types of LLCs, it's essential to know how the business pays you.

How Do I Pay Myself In An LLC?

The owners of an LLC generally receive their income through owner's draws.

This payment method allows you, as the owner, to access a portion of the business's cash reserves for personal use.

For multi-member LLCs, these draws are divided among the partners.

How To Pay Yourself In A Single-Member LLC: Alternative Method

If your LLC is taxed as a corporation, you can receive a salary from the company.

Paying yourself a salary should be based on how much work your role requires and not simply on how much money the LLC has. The Internal Revenue Service (IRS) can audit such payments to ensure they follow IRS guidelines when businesses pay their employees.

It's also important to remember that when you receive a salary from your LLC, it is subject to the same payroll taxes as any other income. You should set aside the necessary amounts for Social Security and Medicare premiums.

How Much To Pay Yourself In A  Multi-Member LLC

If your LLC has multiple members and needs to divide payments amongst partners, you must determine the most equitable way to divide the payments. This process should involve considering each member's contributions and respective company interests.

One option is to provide regular, equal payments to all partners. Alternatively, you can structure payment distributions based on the responsibilities and inputs of each partner.

It's important to remember that legal considerations are critical no matter how you divide up LLC payments.

The IRS requires all members to report their share of the profits or losses on their tax returns.

How Do Multiple Owners In An LLC Get Paid?

The answer is that they get paid in the same way one pays themselves from a single-member LLC. Depending on the company's tax status, this payment is made through owner's draws or salaries.

The owners will receive salaries if it is taxed as a corporation. Otherwise, they will be paid through owner's draws. Additionally, when multiple members are involved, payments should be divided equitably among them based on their contributions and interests.

Best Way To Pay Yourself As An LLC Taxed As A Corporation

Here are a few alternative ways to pay yourself as an LLC that is taxed as a corporation:

  • Pay Yourself as a W-2 Employee: As the owner of your LLC, you can draw a salary from the company and pay yourself via traditional payroll, just like other employees. This might not be the best way to move forward as it means paying quarterly taxes, setting aside money for Social Security and Medicare, filing W-2s, and much more.
  • Earn Profit Distributions: You can also take advantage of the tax benefits of an LLC by making profit distributions to yourself instead of taking a salary. This means you'll be taxed on your profits at lower rates as long as 100% of your income is not derived from your business profits.
  • Pay Yourself as a 1099 Independent Contractor: If you prefer to be paid as an independent contractor, you can set yourself up as a 1099 employee and charge your LLC for your services. This option is best if you provide specialized services or advice to the LLC part-time.
  • Keep the Money in the Business: Alternatively, you can keep your profits and reinvest them in growth opportunities. This could mean hiring more staff, investing in marketing, or saving for a rainy day. Reinvesting earnings into the business can help grow your LLC and create additional value in the long term.

What Happens When One Closes An LLC?

When closing an LLC, you must ensure all taxes have been paid and all debts have been settled. This includes any payments to yourself or other members, so make sure you're up-to-date with your payments for the year before closing. You should also consult a tax professional if you have any questions or concerns about how to pay any LLC member.

How To Pay Yourself From An LLC- FAQ

Can A Single Member LLC Pay Himself A Salary?

No, a single-member LLC cannot pay themselves a salary unless it is taxed as a corporation. For single-member LLCs, one will deliver the payment through owner's draws, not salary payments.

What Are The Typical LLC Taxes?

As a disregarded entity LLC, the IRS tax treatment of LLCs is the same as sole proprietorships, meaning one will report all profits and losses on the owner's tax return. In addition to income taxes due, one may also require self-employment taxes if the business has a net profit for the year.

Also, an LLC license tax may be due annually in some states, depending on the filing requirements in that state. Finally, corporate income taxes will also apply if the LLC is taxed as a corporation.

Conclusion

When paying yourself from an LLC, it is essential to understand the best method for your business.

Whether you form a single-member or multi-member LLC, knowing how to distribute funds from the LLC is integral to understanding your tax obligations.

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About the author 

Mike Vestil

Mike Vestil is an author, investor, and speaker known for building a business from zero to $1.5 million in 12 months while traveling the world.

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