When you run your own LLC that is limited liability company, establishing and making profit from your business becomes more difficult. The IRS made it more complicated by setting a few options on how to pay yourself; In this following article, we’ll discuss how to pay yourself from your own LLC.
Ways To Pay Yourself From an LLC
Below, four ways are given in which you can pay yourself from your own LLC.
Pay Yourself as a W-2 Employee
You can treat yourself as an employee and take all the benefits of an employee just like many LLC owners do.
In this method ,you will get paid like any other employee working in your company. Owner and the employees get paychecks just like you are an employee of some other company or business.
This is the best way, you can pay yourself for completing your everyday basic living expenses till your business generates revenue continuously enough to cover your salary. The IRS says, you have to pay yourself “reasonable compensation.” The IRS doesn’t clearly set an amount range, but it just needs to be a general salary someone doing your work gets paid. Don’t miss out! Check our previously published article on Desired Salary.
Earn Profit Distributions
In this method, you can keep the business profits to yourself. You can pay any LLC members by using profit distributions too.
The process of earning through profit distribution is more complicated if you’re a owner of a multi member LLC, but for a single-member LLC, this process is approximately the same as the way you’d pay yourself as a freelancer.
For multi member LLCs, your operating agreement lays out how profits will be allocated and at what frequency.
The cons of using this method to pay yourself is that you have to pay self-employment taxes on all the money that comes into your business, instead of on only a fixed salary. But if Limited liability company is your main source of income, then you should pay yourself using the method one.
Pay Yourself as a 1099 Independent Contractor
In this method, you can basically pay yourself as an independent contractor in place of getting paid as an employee of the business—but this is not beneficial for most of the small businesses.
Getting paid by this method means you give up taking payment taxes out of your paycheck, and you get your full salary as like any other contractor. Usually, you don’t save money during this process of getting paid. In place of paying for the payroll taxes from, you are now paying that same money as self-employment tax when you pay up for quarterly taxes as a contractor.
This process can prove complex because the owner has to claim taxes in two forms – one for the LLC owner and for your work as a contractor. Have you seen it yet? Check our previously published article on Do Salaried Employees get overtime pay?
Keep the Money in the Business
The fourth method is to not give yourself a paycheck. You can use this method only if you want to put earnings back into the business in place of your pocket, or if you want to keep savings in the business.
You still have to pay income taxes on any profit the business generates, even if you don’t take a paycheck or distribution.
If you’ve elected S-corp tax treatment, be careful about using this option. If you are not paying yourself that might pass the “reasonable compensation” test if the business isn’t making a good revenue. But you can’t keep money in the business for too long to ignore paying the self-employment taxes.
How To Distribute Your Payroll Checks as an LLC Owner ?
Once you’ve set up a separate business entity, you can set up a business bank account, as well. This isn’t compulsory, but it will provide you big help to keep your accounting in order and keep your personal finances safe.
The money earned by doing sales or services should come into the business account first. Use that money to complete your business expenditures, and after covering up the expenses then make payments into your personal account that you use for your own and household expenses.
You can withdraw the money from your business account in any form like cash, paper or electronic checks, ACH payments, according to your need. For more information, check our previously published article on Can You Pay an Employee Salary and Hourly?
Bottom Line
Paying yourself from an LLC can seem complicated, but it doesn’t have to be. If the business is making revenue continuously and you participate in the work actively, you should pay yourself a salary as an employee. But you have other options to explore if your circumstances are different—if the business isn’t earning a profit or you’re a shareholder who doesn’t actively work in the company.
Payroll services can take care of a lot of the heavy lifting for you once you decide how you’ll be paid. Free payroll software is also an option if budget is a concern. Make sure to check our previously published article on How to decline a job offer because of salary.
Frequently Asked Questions
No; You have several options to pay yourself from an LLC, including salary, wages, profit distributions and independent contractor pay. You can keep money in the business if the revenue is not enough.
You can decide your salary as an LLC owner, but your tax deductions might affect how much it should be. You can earn extra income as distributions of profits from your business.
Conclusion
In conclusion, we can say that all the four methods given here, to pay yourself, have their own benefits and disadvantages. If you want to abstain from the salary you can do that too and keep your money in the business until your business runs smoothly. You can opt for any of the methods according to your needs, it totally depends on you. Also see: What if a salaried employee works less than 40 hours?
