How To Pay Yourself From An LLC (2023 Guide)

If you’re a proud owner of an LLC and wondering how to pay yourself, you’re not alone. Many LLC owners face this question when it comes to receiving payment. In this article, we’ll explore four main ways that you can pay yourself from your LLC. So, let’s dive in!

1. Pay Yourself as a W-2 Employee

One advantageous way to receive payment from your LLC is to treat yourself as an employee. By doing so, you, along with other owners who actively work in the business, become employees/owners of the company. This means you receive regular paychecks, just like any other employee.

To ensure compliance with the IRS, it’s important to pay yourself a “reasonable compensation.” The IRS doesn’t provide an exact amount, but it should be in line with what someone in your position would typically earn. By paying yourself this way, you also have the option to be treated as an S-corporation for tax purposes.

The benefit of this method is that you only pay FICA, Medicare, and Social Security taxes (also known as “self-employment tax”) on the salary or wages you pay yourself, rather than on all the business profits. This can result in a tax savings of around 15% on a portion of your income.

2. Earn Profit Distributions

Another way to receive payment from your LLC is through profit distributions or owner’s draws. This method involves passing business profits on to the owners (LLC members).

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For single-member LLCs, this process is quite straightforward. You simply receive money into your business and distribute it to your personal bank account. However, for multimember LLCs, the allocation of profits and the frequency of distributions should be outlined in your operating agreement.

It’s important to note that if you primarily rely on your business as a source of income, paying yourself solely through profit distributions means you’ll pay self-employment taxes on all the money coming into your business, instead of just on a designated salary. In such cases, it might be more beneficial to pay yourself a salary as an employee and take an owner’s draw from additional profits.

3. Pay Yourself as a 1099 Independent Contractor

While technically possible, paying yourself as an independent contractor instead of an employee is not usually advantageous for most small businesses.

When you pay yourself as a contractor, you don’t withhold payroll taxes from your paycheck, and your personal account receives your full pay, just like any other contractor. However, this doesn’t necessarily result in savings. Instead of paying payroll taxes from your paycheck, you’ll need to pay an equivalent amount as self-employment tax when you make quarterly tax payments as an independent contractor.

This approach can become complex because you’ll need to handle taxes both as the LLC owner and as a contractor. It may be suitable if you’re a shareholder in an LLC where you don’t actively work and only provide occasional services. However, it’s not a common approach for LLC owners who are actively involved in running their businesses.

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4. Keep the Money in the Business

The final option is not to pay yourself a regular paycheck at all. This strategy may be useful if you want to reinvest earnings back into the business or build up savings within the company.

However, it’s important to note that you’ll still have to pay income taxes on any profit generated by the business, even if you don’t take a paycheck or distribution. LLCs are typically treated as pass-through entities for tax purposes, meaning the profits are included in your income. The business itself doesn’t pay separate taxes on those profits.

If you’ve elected S-corp tax treatment, be cautious when considering this option. While not paying yourself might pass the “reasonable compensation” test, especially if your business isn’t generating significant revenue, leaving money in the business solely to avoid paying self-employment taxes can result in fees and back taxes in the future.

Remember, understanding how to pay yourself from an LLC is crucial for your financial well-being. By carefully considering these four methods, you can choose the approach that best suits your needs and helps you achieve your financial goals.

For more valuable financial tips and insights, visit Simple Money Tips – Steps To Financial Freedom. Start paving your way towards financial freedom today!