Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
Being self-employed is an awesome venture, but it does require a lot of planning and understanding of how to manage your finances.
If you work alone instead of a sole proprietorship, you might want to establish a single-member LLC.
You can protect yourself and your company from lawsuits regarding personal asset protection. Also, you will reap the benefits of having a more validated business structure.
A typical question when people do decide to go this route is how they can pay themselves.
Once you own an LLC, you have to keep in mind that your personal and business finances should be separate. It’s understandable how it could be confusing to decide how you can pay yourself while remaining in compliance with the IRS.
We’ll discuss the best ways to go about paying yourself and leaving a paper trail. That will ensure everything lines up, and you do it correctly.
How Can I Pay Myself With a Single-Member LLC?
The best way to pay yourself if you have single-member LLC is to make an owner’s draw.
In this instance, your LLC would be considered a disregarded entity. That essentially means that your income and your company’s profits are the same.
When the year is over, you would report them using Schedule C from your 1040 IRS form for your taxes.
If you make an owner’s draw, it’s as if you’re acknowledging the fact that a portion of your LLC income will be retained earnings that stay with the company. And you note that you’ll keep some for personal expenses.
How to Create an Owner’s Draw?
There are only two steps required to make an owner’s draw.
First, make a check out to yourself from the business account you have. Make it in the amount that you want to withdraw from your business. Deposit the check from your business account into your personal banking account.
Next, you need to record this withdrawal in your books and deem it an owner’s draw. That is a reduction in the owner’s equity account.
By using this method, you can continue to draw funds from your business revenue as you deem necessary. So, instead of having a regular recurring income, you get more latitude to do so as you will and adjust the amount of money you get. Of course, this all depends on how well your business does.
You have the autonomy to draw as much money as you desire and as frequently as you desire with the draw method. As long as your balance is current, you may do as you please.
The only thing you have to keep in mind is that the draws you do become a hindrance to building your business if you’re constantly making withdrawals and not separating a profit.
How Do I Pay Taxes on an Owner’s Draw?
When you’re a sole proprietor, you have to pay the income tax on every profit that you receive. How much you draw is not a factor in this scenario. Even if you decide to let your revenue stay with the company, you still have to pay the tax on how much you earned.
Therefore, in conjunction with laying local, state, and federal income taxes, you also must pay self-employment taxes in your owner’s draw. However, keep in mind that the self-employment tax will be assessed on the profit in a disregarded entity, regardless of whether the money is taken out as an owner’s draw.
This is similar to FICA taxes that get taken out of an employee’s check. The tax rate for self-employment is 15.3 percent. Nearly all businesses should pay estimated quarterly taxes every quarter.
Read our article on LLC taxes for more advice on this subject.
How Do I Pay Myself as My Business Grows?
Pay yourself a limited salary (from your LLC income) that you maintain regardless of making extra cash. By paying yourself a percentage, you get the opportunity to invest in your business continually. If you’re still small, you may have to take a lower salary so that you can improve your products or services.
There will be a point where your business begins to generate a considerable income; this will be the time to shift to a salary model. The shift to a formal salary model paid via payroll will also accompany a corporate election (either S-corp or C-corp). That will allow you to have a consistent personal income stream while simultaneously supplying your business with more than enough funds to grow your business.
In regards to ensuring that you’re paying yourself following LLC’s compliant status, make sure that you’re not overpaying yourself.
Fortunately, it is easy to avoid this situation. If you research what the industry norms are for someone with your job, and you do not exceed these limits, you’ll be just fine. On another note, you are also allowed to pay yourself bonuses along with your salary. Of course, this has to be within reason to avoid any trouble with the Internal Revenue Service.
How Paying Yourself as a Single-Member LLC Differs From Other Types
The way you go about paying yourself isn’t the same as other types. Below are the ways they differ:
Getting Paid From a Multi-Member LLC
The way a multi-member LLC gets paid all depends on whether it’s a corporation or a partnership. However, when it comes to the IRS, they treat every multi-member LLC as a partnership by default.
Partners that are in an LLC can get their earnings in the form of draws, very similar to a single-member LLC.
However, this particular partnership is something called a pass-through entity. That means even though it reports its income to the IRS by way of IRS Form 1065, the partnership is exempt from tax nevertheless.
In this case, each member pays a portion of the complete income tax on the earnings of the partnership instead. Moreover, the size of the share gets determined by the partnership agreement.
By the end of the year, each member will get an IRS Schedule K-1 from the partnership. They will report their share of the partnership’s income. Schedule K-1 is a tool used to prepare all of the partners’ personal income tax returns.
Getting Paid From a Corporate LLC
Shareholders (LLC members) cannot be exclusively paid on draws, no matter if they’re in the C corporation or S corporation. They can still receive part of their compensation via distribution, but they must also be paid a “reasonable salary.” Alternatively, they can be hired on as employees and paid the form of a salary without distributions.
In addition to the salary, they can take an extra percentage of the corporation’s income in dividend form. The amount that they can take out is detailed in the articles of incorporation.
When you are an employee of your corporation, your payroll tax, and income tax are automatically withheld from your earnings.
The Last Word
Paying yourself from a single-member LLC isn’t as complicated as it may seem. Essentially, you have to be attentive to paying yourself enough money to pay your bills and expenses, while being sure not to overpay yourself.
Overpaying yourself is a sure-fire way to get unwanted attention from the IRS.
No matter if you pay yourself in the form of a salary or a percentage of the business income, researching what your job usually earns is a must.
Hopefully, this article has given you a better understanding of how to pay yourself from a single-member LLC.
Filed under: Advice Columns