So, you have a small limited liability company (LLC), and your business has grown fast.
Great work!
But now you’re wondering how to pay yourself as a single member LLC?
Single member LLCs are incredibly convenient and popular business structures for small businesses. They offer the most flexibility when it comes to taxes, as it allows small business owners to choose what type of tax filing they prefer. Either a disregarded entity or a corporation
Single member LLCs provide both convenience and flexibility. They are an efficient way to structure operations and pay yourself out of profits. All while still maintaining legal protections from personal liability risk.
Sounds perfect, right? Read on to discover exactly how to pay yourself as an LLC.
What Exactly Is a Single Member LLC?
A single member LLC (SMLLC) is a type of limited liability company (LLC) that has only one owner, also known as a “member.” A single member LLC protects the owner’s personal assets from the company’s debts and liabilities, just like a multi-member LLC (MMLLC).
Single Member LLC Vs. Sole Proprietorship
Single member LLCs and sole proprietorships are two of the most popular business structures that small business owners can choose from. Both have their advantages and disadvantages, so it is important to understand the differences between them.
The main difference between a single member LLC and a sole proprietorship is how they are taxed. The IRS calls single member LLCs “disregarded entities.” This means that the business’s income and expenses are included on the owner’s personal tax return.
This simplifies things for the owner. Taxes can be paid directly from one’s paycheck instead of having to pay estimated quarterly taxes at different times throughout the year.
A sole proprietorship is subject to self-employment tax rates. This means an additional 15.3% of total income must be paid in taxes throughout the year. Any LLC profits earned by a single member LLC are not subject to self-employment tax.
From a legal point of view, both structures offer some protection against the risk of personal liability.
A single member LLC offers more flexibility when it comes to protecting assets. If a person runs a business as a sole proprietor, any debts or legal actions taken against the business could put the person’s personal assets at risk.
Another major difference between these two types of business structures is access to capital and financing options.
Because it’s a separate legal entity, a single member LLC can get loans and find other ways to get money. A sole proprietorship might not be able to. This can give small businesses room for growth and expansion if needed in the future.
When deciding between these two types of business structures, it depends on the protection you need for yourself and your investments.
Ways To Elect Your Business For Tax Purposes Inside LLC
When you’re ready to pay yourself out of your single member LLC, the first step is to elect how your business will be taxed. Here are some options:
Default
The default tax status for a single member LLC is “disregarded entity,” meaning that the business does not pay taxes. All income and expenses are reported on the owner’s personal tax return. This is known as “pass-through” taxation, as all LLC profits will be passed directly to the owner.
S Corporation
The other option available is to elect to be taxed as an S corporation. This will mean filling out Form 2553 with the IRS and doing more paperwork, like filing quarterly tax payments and business taxes all year long. The advantage of this structure is that the business pays taxes on its profits, not the owner’s personal income.
C Corporation
The final option is to elect taxation as a C-Corporation. This involves filing a Form 1120 with the IRS, and it comes with additional paperwork, such as filing quarterly taxes and business taxes throughout the year. The benefit of this structure is that the business pays its own taxes on profits, not the owner’s personal income.
You will always be able to pay yourself from a single member LLC, regardless of the tax form you choose. But there are different ways to send money and different tax consequences for people and businesses.
Taxes To Pay As A Single Member LLC
When running a business as an SMLLC, there are certain taxes that you will need to know how to pay yourself as a single member LLC.
Income Tax
First and foremost, you will be responsible for paying income tax on any LLC profits earned by your single member LLC. Depending on the type of business structure you choose, you could pay this by filing a tax return or by making quarterly estimated tax payments.
Self Employment Tax
If you are taxed as a disregarded entity, which is the default, you will also have to pay self-employment tax. This is a 15.3% tax on all profits earned and is designed to cover both Social Security and Medicare taxes.
Employment Taxes
If you hire people to work for your business, you will also have to pay taxes like federal income tax withholding, Social Security, and Medicare contributions.
How To Pay Yourself as A Single Member LLC
There are a few different ways to pay yourself from a single member LLC. The IRS considers all payments you receive from your business as income, regardless of the form they take (salary, dividends, etc.). Here’s how to pay yourself as an LLC.
Owners Draws
This is basically a distribution of money from your business’s profits that can be taken out on an as-needed basis. You will then have to report the income from these draws on your personal tax return for that year. You can do this by:
- Writing Check: Pay yourself from an LLC as you would any other employee
- Cash Withdrawal: Take cash out of your business checking account and deposit into your personal bank or credit union account
- Transfer to Personal Account: Move money from your business checking account to your personal account at a bank or credit union. Be sure to keep accurate records of all transactions.
In the end, it doesn’t matter which technique for how to pay yourself as an LLC. It’s merely an issue of convenience. The tax ramifications are identical, and the transactions appear in your accounting records similarly.
To record an owner’s draw, you must take money out of your company’s cash balance and put it into its retained earnings accounts.
Unlike a salary, an owner’s draw doesn’t have to be paid on a set schedule or for a set amount, unless you say so in your operating agreement. As a result, you can alter them to fit your company’s cash flow throughout the year.
Don’t Make This Mistake
When you pay yourself as a single member LLC, it is important to remember that you cannot pay yourself too little. Paying yourself as a single member LLC too little can lead to penalties from the IRS.
Be sure to pay yourself from an LLC for the work you do, and make sure you report it accurately on your taxes.
How much you should pay yourself from your LLC depends on several things, like how much money your business makes and how much it costs, how much money you need for yourself, and your overall business strategy.
You must pay yourself a fair wage. This salary should be about the same as what you’d make in a similar job at a similar company in your industry. List the salary as wages on your personal tax return. Payroll taxes should be taken out and sent to the IRS.
The business should keep enough cash on hand to pay for operating costs and invest in the business’s growth.
But what does it mean when the IRS says you should pay yourself from an LLC a “reasonable” salary? They never say why.
Here’s what works best:
- Add up all of your personal expenses for the year. That’s how much you need to make at least.
- With the help of an accountant, look at your books and figure out how much more than your personal expenses your business can afford to pay you.
- Look at statistics about how much people make in different industries and jobs. Find out what the average range of pay is for your job.
- Pay yourself a decent wage.
- The less you get as a salary and the more you get as dividends, the less you’ll have to pay in taxes. Finding the right balance is the key. This can be helped by a bookkeeper.
Advantages Of Having LLC Tax Elected As S Corporation
An LLC can be taxed as an S corporation by filing Form 2553 with the IRS. This election allows the LLC to pass corporate income, losses, deductions, and credits through to its members, who report this information on their personal tax returns.
This means that the LLC does not pay taxes on its income; instead, the income is taxed at the individual member level. This can provide tax savings for the LLC, as S corporation income is only subject to one level of taxation.
S corporation status can provide personal asset protection for the members of the LLC, as the business liabilities are separate from the personal assets of the members.
How To Pay Yourself As An LLC: FAQs
How do I pay myself from my LLC?
You can pay yourself as a single member LLC by writing yourself a check, withdrawing or transferring funds to your personal bank account, and taking owner’s draws. Be sure to keep accurate records of all transactions and payments you make.
Can I pay myself and count it as an expense with an LLC?
No, payments made to yourself should not be counted as an expense. For payments to count as an expense, they must be made to an outside party or vendor.
What percentage of income should I pay myself from my LLC?
The percentage of income you pay yourself in an LLC will depend on how much money the business is earning and how much you need to cover your expenses.
Generally speaking, it’s a good idea to pay yourself through an LLC enough to cover your living expenses but not so much that you risk running the business into debt. You should also factor in taxes and other liabilities into your calculations.
The Bottom Line: How To Pay Yourself As An LLC
Working out how to pay yourself with an LLC is an important part of running your business. Be sure to pay yourself in an LLC a reasonable salary and report that income accurately on your taxes.
You may save money by electing the LLC as an S corporation, which can provide personal asset protection for the members of the LLC. Paying yourself from your LLC does not have to be complicated; just be sure to keep accurate records of all transactions and payments.
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