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So, I have an LLC how do I pay myself?

So, I have an LLC how do I pay myself?
So, I have an LLC how do I pay myself?

An LLC is like a special kind of business that mixes the good parts of two other types of businesses, corporations and sole proprietorships. It helps protect the people who own it from having to pay for business problems with their own money. With an LLC, the money the business makes or loses gets reported on the owner's tax forms instead of a separate business one, and they don't have to hold yearly meetings.

Specific laws vary by state, but in general, LLC owners are called members. There can be as many members in your business as you like. Types of LLCs include:

  1. Single-member LLCs: These are LLCs with just one person owning them. The IRS sees them as similar to sole proprietorships for taxes unless you ask them to be treated differently. See #3

  2. Multi-member LLCs: These LLCs have more than one owner. The IRS treats them like partnerships for taxes unless you ask for a different treatment. See #3

  3. Corporate LLCs: Some LLCs choose to be taxed like corporations. To do this, they need to fill out a special form called Form 8832, Entity Classification Election, and send it to the IRS.

Single-member LLCs: Owner's draw

When it comes to taxes, the IRS sees single-member LLCs as something called "disregarded entities." That means they treat the owner and the business as one thing. So, any money the LLC makes is seen as the owner's income, just like if they were running the business alone.

Instead of getting a regular paycheck, the owner of a single-member LLC pays themselves through something called an "owner's draw." They can decide how much and how often they take money out of the business. But it's smart to make sure there's still enough money left in the business to keep it running smoothly and to help it grow.

My Virtual CFO-ATL recommends that you have separate business and personal accounts.

Multi-member LLCs: Owner's draws and guaranteed payments

For multi-member LLCs, which the IRS sees as partnerships, there's something called "pass-through" treatment. This means the business itself doesn't pay taxes. Instead, the income gets reported to the IRS, but it's the individual members who pay taxes on their share of the profits.

Just like with single-member LLCs, the owners of multi-member LLCs also pay themselves through owner's draws. They can decide how much of their share of the profits they want to take out, as long as there's enough money left in the business for expenses and growth.

If the LLC has enough money saved up, it can also set up guaranteed payments for members. These are like regular salaries and get paid to the members no matter how well the business is doing.

Corporate LLCs: Salary and distributions

When an LLC chooses to be taxed as an S corporation or C corporation, the members (who are now called shareholders) can't take the owner's draw anymore. Instead, they're seen as employees of the company. So, they have to pay themselves a fixed salary through the company's regular payroll system, just like other employees. This means taxes get taken out of their paychecks.

To handle this, the company can use payroll software or My Virtual CFO-ATL to manage the payroll process. It ensures that everything is done correctly and that taxes are handled properly.

As an owner of a corporate LLC, you have the freedom to set your salary, but it has to be considered "reasonable compensation" according to the IRS. That means it should be similar to what someone would be paid for doing similar work in a similar business.

Apart from your salary, you can also choose to pay yourself distributions or dividends. These are portions of the business's profits that are paid out to you. Unlike with a regular salary, you don't have to withhold payroll taxes from distributions or dividends. However, they still count as taxable income.

How do owner’s draws work?

When it's payday for you as the owner of a single-member LLC or as a multi-member with check-writing privileges, it's all about being organized. You'll want to issue yourself a check or set up a direct deposit, and it's crucial to keep good records of these payments.

Paying yourself in cash isn't a good idea because it can lead to mistakes and raises red flags with the IRS. Instead, you can issue payment by writing a physical check, transferring money electronically through your bank, or using payroll software. At this stage, you don't have to worry about withholding taxes but remember, you'll still need to pay taxes on this income later on.

My Virtual CFO- ATL recommends enrolling in EFTPS to pay Quarterly estimated taxes

As the owner of a single-member LLC, your business doesn't file its tax return. Instead, you report the profits and losses of the LLC on Schedule C of your tax return, just like you would with a sole proprietorship. This means you'll owe income tax on the full amount of the LLC's profits, regardless of whether you've taken all of that money out for yourself. Additionally, you'll need to pay self-employment tax for Social Security and Medicare on those profits.

For a multi-member LLC treated as a partnership, the business itself doesn't file a separate tax return. Instead, each member reports their share of the LLC's profits and losses on their tax returns. Regardless of whether they've taken all of that money out for themselves, each member owes income tax on 100% of their profit share. Plus, they're also responsible for paying self-employment tax for Social Security and Medicare.

On top of that, multi-member LLCs are required to file IRS Form 1065, which is an informational return that shows the LLC's income, deductions, and credits. Each member then receives a Schedule K-1, which details their share of the LLC's income, losses, deductions, and credits. Members use this information to complete their tax returns.

How are corporate LLCs taxed?

When an LLC chooses to be taxed as a C corporation, it becomes a separate tax-paying entity. This means the business itself must file a corporate tax return and pay taxes on its profits. Additionally, if the owners receive dividends from the corporation, they may be taxed again on that income on their tax returns.

On the other hand, LLCs that elect to be taxed as S corporations don't pay taxes at the corporate level. Instead, the income "passes through" the corporation to the individual owners, who report it on their tax returns. This avoids double taxation because the income is only taxed once, at the individual level.

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