If you have an LLC as an entrepreneur, you’re already on your way towards long-term sustainability, but figuring out how to pay yourself can be tricky. As a business owner, you want to maximize your income while staying on the right side of tax laws and regulations. In this guide, we’ll break down the best ways to pay yourself from your LLC, so you can make informed decisions about your finances.
We at The Law Dictionary have simplified complex legal concepts into clear, actionable steps to help you understand how to pay yourself from your LLC. Our team of legal experts has crafted this guide to walk you through the various methods, their pros and cons, and what you need to know to make the best choice for your business.
Take an Owner’s Draw (Profit Distributions)
One of the simplest ways to pay yourself from your LLC is through an owner’s draw, also known as profit distributions. This method works well for single-member LLCs, as you can easily transfer money from your business account to your personal account. For multi-member LLCs, you’ll need to outline the distribution process in your operating agreement to avoid conflicts among members.
When you take an owner’s draw, you’ll report your LLC’s profits and losses on Schedule C of your personal tax return. However, keep in mind that you’ll have to pay self-employment taxes on all the money that comes into your business. This can result in a higher tax bill compared to other payment methods.
Earn a Wage as a W-2 Employee
Paying yourself a regular wage as a W-2 employee can be a smart move for LLC owners. This method provides you with a steady, predictable income and can potentially save you money on taxes. When you pay yourself a wage, you’ll only owe self-employment taxes on your designated salary, which can save you about 15% compared to taking distributions.
To pay yourself as a W-2 employee, you’ll need to follow IRS rules. First, make sure you’re paying yourself “reasonable compensation” that aligns with industry norms. You’ll also need to file IRS Form W-4 to determine how much payroll should be withheld from each paycheck. Remember, you’ll still pay income tax on your wages, but the overall tax burden may be lower than with other payment methods.
Paying Yourself a Wage: Single-Member LLCs vs Multi-Member LLCs
The rules for paying yourself a wage differ depending on whether you have a single-member or multi-member LLC. For single-member LLCs, you can only pay yourself as an employee if you’re actively working in the business. You can’t be a passive owner with no responsibilities and still collect a wage.
In multi-member LLCs, things get a bit more complicated. If you have a member-managed LLC where all members are responsible for day-to-day operations, you must either pay all members a wage or none at all. You can’t pick and choose which members receive a salary. However, if one member steps back from managing the business, the active members can still pay themselves a wage.
Work as a 1099 Independent Contractor
Another option for LLC owners is to pay themselves as a 1099 independent contractor. While this method doesn’t require payroll taxes to be taken out of your paycheck, it doesn’t actually save you any money on taxes in the long run. You’ll end up paying the same amount in self-employment taxes that you would have paid in payroll taxes.
We generally don’t recommend this method for small businesses because it achieves the same result as other methods but requires more strict bookkeeping. The only time it might be beneficial is if you want to pay yourself as a passive business owner who doesn’t actively work for the LLC, as you can’t pay yourself a wage in that situation.
Return All Profits to the Business
If you’re focused on growing your business aggressively, you might choose not to take a paycheck at all and instead reinvest all company profits back into the business. While this can be a smart growth strategy, there are still some tax implications to consider.
Even if you don’t take any wages or distributions, you’ll still need to claim any company profits on your personal income tax return if your LLC is taxed as an S corp. This is because LLCs are treated as disregarded entities for tax purposes, meaning any profit the company makes passes through to you and becomes your tax liability.
Making the Right Choice for Your LLC
Choosing how to pay yourself from your LLC is a big decision that can have significant impacts on your personal finances and business growth. While we’ve outlined the main options here, the best choice for you will depend on your specific situation, business goals, and tax considerations. We strongly recommend working with a professional LLC formation service or tax advisor to help you make the right decision for your business. They can provide personalized advice based on your unique circumstances and help you navigate the complexities of LLC ownership and taxation.
FAQs
How much should I pay myself from my LLC?
You should pay yourself a reasonable salary based on industry standards and your business’s profitability. Consider your role, responsibilities, and the financial health of your LLC when determining your compensation.
Can I set up an LLC by myself, or should I hire someone?
While you can set up an LLC yourself, we recommend hiring a professional service. They can help you navigate the legal requirements and ensure your LLC is properly formed, saving you time and potential headaches down the road.
What are self-employment taxes?
Self-employment taxes are Social Security and Medicare taxes that self-employed individuals must pay. They’re similar to the payroll taxes that employees and employers split, but self-employed people are responsible for the full amount.
What is an S Corp?
An S Corp is a tax classification that some LLCs choose to adopt. It allows the business to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes, potentially offering tax advantages in certain situations.
