Discover how to pay yourself from an LLC. Check out the guides below.
You’ve formed an LLC and you’re making money. That’s great news, but it begs the question: How do you pay yourself as an LLC? Do you just write out a check? Or do you pay yourself a salary, deduct employment taxes, and give yourself a paycheck? The answer depends on how your LLC is structured for tax purposes.
Here are the three most common ways owners pay themselves in an LLC.
When you form a limited liability company (LLC), by default, for tax purposes, the IRS treats the LLC like a sole proprietorship or partnership. It considers the LLC a “disregarded entity” which is also known as a “pass-through” business. The profits and taxes due pass through to the individual business owners’ personal tax returns. (Owners of an LLC are called members.)
Under these circumstances, to pay yourself as an LLC owner, you don’t get a salary or a paycheck. If you’re a one-member LLC, you just withdraw money from the LLC bank account and deposit it in your personal account whenever you want. This is called an owner’s draw, or just a draw.
The LLC doesn’t withhold any taxes and doesn’t get a deduction for the profits you withdraw. The business income and expenses are reported on your personal tax return at the end of the year.
All the LLC’s annual profits, whether you’ve withdrawn the money or not, passes through to your personal tax return. For example, if your one-person LLC has profit of $175,000 for the year, you have to pay income taxes and self-employment taxes (Social Security and Medicare) on the entire $175,000 even if you only take $90,000 out as an owner’s draw.
In a multi-member LLC, profits are distributed among all the members based on terms spelled out in the operating agreement. Each member pays income taxes and self-employment taxes on their share of profits.
Recommended: How to Pay Yourself When You’re a Sole Proprietor
Although the passthrough business status (also called a disregarded entity) is the default way the IRS treats LLCs, there is another option for paying yourself from an LLC. The LLC can elect to be treated like an S corporation (S corp) for tax purposes. In that case, you and any other members who work in the LLC become employees of your LLC and get a regular paycheck like any wage earner. The LLC withholds taxes, pays the employer’s half of FICA (Social Security and Medicare), and gets to deduct all payroll costs as a business expense.
If the LLC has opted to be treated as an S corporation for taxes, then there’s another way you can take money out of the company: You can split your pay between salary and profit distribution to reduce self-employment taxes.
Dividing your income between salary and profit distribution reduces the self-employment taxes (Social Security and Medicare) because S corp profit distributions are not subject to self-employment taxes. Thus, if your LLC has $175,000 in profits, you might take $90,000 as a salary and $85,000 as a distribution of profits. You have income taxes, Social Security, and Medicare taxes withheld from the $90,000 salary. You will still have to pay income taxes on the $85,00 distribution, but you won’t have to pay any self-employment tax on it. That can be a huge savings. Here’s how it works out.
Social Security and Medicare Savings with an S Corporation Election
One-Member LLC Yearly Profit = $175,000
Owner Savings: $13,005 ($26,775 – $13,770)
Reasonable Salary Rule
One caveat: The IRS requires you to pay yourself a reasonable salary. In other words, a salary that’s at least average for your position and industry. Avoiding taxes by taking too much as a distribution can result in having to pay back taxes plus penalties.
Recommended: Self-Employment LLC Taxes Guide
Technically, you could get paid from your LLC by working for it as an independent contractor. But it’s not a practical option. It results in more paperwork without saving you any taxes.
If you bill your LLC as an independent contractor, the LLC will have to file form 1099-NEC with the IRS and issue a copy of it to you. Although the business gets to deduct the amount it pays you from its profits, you still pay income taxes and self-employment on the 1099-NEC income. So, you don’t save anything.
When it comes time to cut yourself a paycheck, you’ll need to do it in a way that preserves your personal liability protection. Otherwise, why did you bother forming the multi-member LLC in the first place?
Especially in the early days of a business, you might not have much money coming in. But once you do receive an influx of cash, many entrepreneurs aren’t quite sure how they’re supposed to transfer those business funds into their personal accounts. In our experience, the best way to go about this is to pay yourselves a regular salary, or a percentage of your LLC’s income.
For a young, growing LLC, it usually makes the most sense to pay your owners a percentage of your business income, while investing the rest of it back into your business. For example, let’s say you invest half of your income into growing your company, while paying yourselves the other half.
Once you’ve reached a point where the business is generating a solid amount of income, you’ll probably want to shift to a salary model. This way, you all have consistent personal income streams, while also providing your business with plenty of funds to spur growth.
As for making sure you’re paying yourselves in a way that maintains your multi-member LLC’s compliant status, the main thing you’ll need to focus on is making sure you’re not overpaying yourselves. If you do, this is an easy way for a court to say that your business is not a separate entity from your owners as individuals, which could lead to having your personal asset protection revoked.
Thankfully, this situation is rather easily avoided. All you need to do is figure out what the industry norms are for your jobs and make sure you don’t exceed those limits. In addition to your salaries, you are also allowed to pay yourselves bonuses, but again, these need to be reasonable if you don’t want any trouble with the Internal Revenue Service.
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How do LLCs work?
LLC is an acronym for limited liability company. It’s a hybrid form of business that makes a business a separate entity from its owners. It offers owners the limited liability protection of a corporation without the operational difficulties or double taxation of a C corporation.
The LLC form of business is a legal status, not a tax status. By default, you’ll be taxed a sole proprietorship or partnership and pay yourself with a draw on profits. However you can elect to be treated as a S corporation for tax purposes, and pay yourself a regular salary.
What’s the best way to pay yourself as a business owner?
If your business is profitable, the best way to pay yourself is to split your income between salary and profit distributions. To do this, the business has to be a corporation or an LLC taxed as a corporation or S corporation.
Why should you form an LLC if you’re a one-person business?
Setting a business up as an LLC makes it a separate legal entity from you, the owner of the business. Thus, it helps shield you from personal liability and protect your assets. If your LLC elects to be taxed as an S corp, there can also be tax advantages to the LLC status.
Benefits of an LLC vs Sole Proprietorship
Does the LLC need its own bank account?
Yes. Because the LLC is a separate entity from its owners, it must have its own bank account. All company income goes into the LLC account and all expenses get paid from that account.
Manage your business finances with ZenBusiness Money
What is an owner’s draw, and how is it different from a paycheck?
An owner’s draw is not a wage or salary. It’s money business owners withdraw from the business profits and give to themselves whenever they want. It’s the only way sole proprietors and owners of LLCs that are treated like a sole proprietorship for tax purposes can pay themselves.
A paycheck is the payment of wages to an employee. It’s the employee’s salary, minus income tax, FICA, and any other withholdings.
No taxes are withheld on an owner’s draw. The owner reports the income and calculates the taxes due on their personal return.
Can I avoid taxes by leaving profits in the LLC account?
No. Owners are taxed on all the profits of the LLC in the year the profits are incurred. So, if the business has profits that haven’t been taken out as a draw or paid out in salary, those profits will pass through to the owners and must be taxed on their personal tax returns.
How does the formation process differ between single-member and multi-member LLCs?
For the most part, the process of forming a single-member LLC is identical to that of a multi-member LLC. That said, multi-member LLCs do sometimes have to provide more information about the company’s ownership and managerial structure. See multi-member LLC definition.
Should I use an LLC service, hire an attorney, or form my own LLC?
The answer to this question lies in your personal preferences, but we can give some general pointers. A reputable business attorney will cost the most by a mile, but also provides expertise you won’t find with the other options. The do-it-yourself route is free of charge but can require quite a bit of legwork and provides no peace of mind that the process is being completed correctly.
Using an LLC service means your business will be formed by professionals who know what they’re doing while also costing significantly less than a lawyer. This “best of both worlds” attribute is what makes LLC services our preferred option.
How do online LLC services work?
Using an online LLC service removes much of the hassle from the business formation process. With these services, all you need to do is provide them with the name, location, and industry your business operates in, along with some info about yourself and your registered agent.
The service then creates your Articles of Organization and files them with your state to create your new LLC.
Are LLC formation websites legit?
Absolutely. There are quite a few reputable companies offering LLC formation services these days.
Should I form an LLC or corporation?
This is an impossible question to answer in an across-the-board manner, as each business type has its own advantages and disadvantages. That said, the LLC is typically the more suitable option for small businesses and solo entrepreneurs, while the corporation is usually a better fit for large companies. For more info, check out our complete comparison guide between LLCs and corporations.
When is the best time to start an LLC?
We think you should start an LLC before you begin conducting business. While it is entirely legally acceptable to operate your business as a sole proprietorship or general partnership before forming an LLC, doing so subjects you to a number of risks that LLCs don’t have to worry about.
For example, informal business structures don’t have limited liability protection, so any lawsuit filed against the business can include the owner’s personal assets as well as the business assets.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
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