How to Pay Yourself in a Single-Member LLC?
Depending on whether you have chosen to be taxed as a S-corporation or sole proprietor will determine how you pay yourself in a single member LLC.
Put simply, an owner may write check to themselves, after accounting, if the LLC is taxed as a sole proprietorship. This method is less complex than if the LLC owner was an employee. The check an owner writes to himself would be treated as personal income. However, you will have to pay self-employment tax on your income, and those rates can be very high. You will also have to file quarterly taxes.
Once revenue increases from your LLC to make a living wage, it is typically advisable in a single-member LLC to be taxed as an S-corporation.
In an S-corp taxation, the LLC owner is an employee of the business. There are two different ways to pay yourself as both the owner and an employee. First, you will pay yourself a salary. After your salary, you can take profit distributions from your business.
The Internal Revenue Service, or IRS, requires that an owner take a reasonable salary from their business. In other words, the IRS does not want owners to pay themselves all through profit distributions because those profit distributions are taxed less. The IRS wants owners to pay themselves a reasonable salary as an employee of your their business to ensure that owners are paying adequate payroll taxes. When an owner pays themselves a salary, they have to pay both the employer and employee sides of their payroll taxes.
The IRS does not define what a reasonable salary is with great clarity. A reasonable salary will certainly depend on the industry, the type of job, and locality. Another consideration is how much others in the same state or city are being paid for doing a similar type of job.
An owner will want to consult with an attorney or with a tax professional to make sure they are paying themselves an adequate salary. If an owner pays themselves inadequately, it could trigger an audit and could subject the owner to back taxes and penalties.
Now, once an owner has paid themselves an adequate salary as an employee of their business, the owner can take additional amounts as profit distributions. Profit distributions are taxed at a lower rate. The lower tax rate is why business owners want to take the profit distributions and not pay themselves entirely as employees. Again, it is advisable to discuss profit distributes with an attorney or a CPA. To take a profit distribution, an owner can write themselves a check.
An owner will also need to pay quarterly taxes on any profit distributions. The tax is at a much lower rate than an owner would have to complete as a sole proprietor, but the money is still taxed, just like any other income.
For more information about Limited Liability Companies, contact Curington Law, LLC at 312 803-1755 or online.