How to Pay Yourself in an LLC
LLC owners have different options of paying themselves but each one comes with some implications of taxes. Forming LLC is the best option to save oneself from liabilities and protect the personal assets.
There are two simple ways to pay yourself when you are related to any LLC. You have to act as an employee and pay yourself wages or become a partner and member in the LLC to earn living through profits of LLC.
Paying yourself as a wage earner
If you are seeking a regular income from your LLC then it is best to act as an employee and receive income throughout the year.
You need to actively work in the LLC as an employee or apartment to earn the living. For that you need to take responsibility of certain activities that you have to perform each day as an owner or employee of LLC.
It becomes difficult to pay oneself when the LLC is a multiple member entity. The owner cannot pay salary to all the multiple owners. In case you are the only member in LLC then you can easily pay yourself salary without setting up salaries for remaining members of LLC.
You need to keep in mind that the salary that you pay yourself must be in the standards of industry norms because those salaries are considered as operating expenses for the LLC which are an important concern for Internal Revenue Service IRS. Another way to do that is to issue bonuses to the members of LLC who act as employees and you can pay yourself too, but all these payments must be in alignment with the industry norms.
You will also need to file IRS form W-4 that will determine the payroll withholding from each receipt of cheque. You will be paid by LLC as W-2 employee and LLC will hold income and employment taxes from. In this case you will be required to pay tax on your earned wages.
Receive distribution from LLC profits
Another way to earn living through working in LLC is to receive distributions from profits of LLC every year. You as a member of LLC have some capital amount in the company and you can receive year end profits through the distribution of profits. Let’s say, if you had invested $50000 in your LLC then from a total profit of $20,000 you will receive $10,000 as a distribution share from profit.
An alternative way to do that is to receive on going payments each month by setting up an expected profit of the company every year and accordingly pay yourself each month. Let’s say that your expected earning for whole year will be $24,000 then you can set up a regular payment of $2,000 each month. LLC will deduct the year end profits on the basis of total amount you have received each month through your expected earning as a capital investor. For example, the total amount of profits on your name is $20,000 and you have received $16,000 then the company at the end of the year will pay you only $4000.
In case you are the only member of the LLC then you will pay income tax on profit distributions on your name and you will also file Schedule C to report the loss and profit in your LLC with your personal tax return. If there are two or more members in the LLC then each member will be required to disclose the profits and losses according to the distribution of profits by LLC and pay income tax on those profits. The LLC will also file IRS form 1065 that will disclose the distribution of profits among various members.
You need to understand one thing that receiving a salary and receiving a distribution among profits at the end of the year are not mutually exclusive. Even if you are getting a pay check every month even then you are a member of the company and you are still entitled to your profits that LLC distributes every year.
Work as an independent contractor
Another way to pay yourself when related to any LLC is to act as an independent contractor for the LLC. You can select any activity of your choice that you are capable to do efficiently and do it as a contractor for the company and receive monthly income through the contract. This can be working as a graphic designer or account manager or any other activity you can think of.
IRS requires form W-9 with the LLC and form 1099 MISC that independent contractors have to file at the end of the year. When you are acting as independent contractor for LLC you are also required to pay self-employment taxes on your earned income.
Choose not to receive payment
You can also go for the option of not paying yourself anything and let the profits remain in your LLC. Whether you pay yourself or not you are still receiving profits from your LLC and that is why you are obliged to pay income taxes on your earned profits through your personal tax returns.