As a company owner, you have many alternatives for compensating yourself, but each has tax ramifications.
Creating a limited liability corporation, or LLC, is a terrific method to manage your business while also protecting yourself from responsibility. You must, however, make a livelihood, therefore you may be thinking, “How can I pay myself from my LLC?”
The two most frequent alternatives are to treat oneself as an employee and earn compensation, or to treat yourself as an LLC member and collect profits.
Being Paid as a Wage Earner
Paying yourself as an employee from an LLC enables you to get regular salary that you can count on throughout the year, which may be highly beneficial if you are looking for a consistent income.
You must be actively working in the company to be able to pay yourself wages or a salary from your single-member LLC or other LLC. As an LLC owner, you must have a genuine position with real duties.
When there are several owners, you cannot pay one owner a salary while not paying the others if all of the LLC members contribute equally in the management of the firm. However, if you are the sole member with a managerial position, you may pay yourself a salary without first establishing compensation for the other LLC members.
Wages paid to employees are considered operational expenditures for the LLC and will be deducted from earnings. The Internal Revenue Service (IRS) only permits reasonable wages as a deduction, so be sure any compensation you give yourself is market-rate. You may even pay incentives to LLC members who are workers, such as yourself. These, once again, must be appropriate in relation to the wage being given.
To establish the amount of payroll withholding from each paycheck, you must complete IRS Form W-4. The LLC will pay you as a W-2 employee and will deduct income and employment taxes from your earnings. You will have to pay income tax on your earnings.
Profits from the LLC are distributed to you.
Another way to pay oneself in an LLC is to collect earnings distributions from the LLC each year. Each member owns a share of the LLC, which is referred to as his or her capital account. Profit distributions are paid depending on that proportion at the conclusion of the fiscal year. So, if the LLC profits $100,000 and you and the other member each share 50%, you may each earn $50,000.
You might also set up a draw to receive recurring payments against the year-end earnings. If you estimate your share of the year-end profit to be $12,000, you may set up a monthly draw for $1,000. The amount of all draws made throughout the year is subtracted from the overall year-end profit. So, if your total draw for the year is $12,000, but your part of the profit is $15,000, you will get $3,000 at the end of the year.
If you are the sole member of the LLC, you will pay income tax on your distributions and submit Schedule C with your personal tax return to record the LLC’s revenues and losses. If there are more than one member, the IRS recognises the LLC as a partnership, and you individually report and pay income tax on your share of the earnings. The LLC will submit IRS Form 1065 to detail how earnings are distributed to members.
It is critical to understand that having a salary and collecting year-end payouts are not mutually incompatible. Even if you get a paycheck, you are still a member of the LLC and are eligible for the year-end payout.
Working as a Freelance
A third way to pay yourself is to work as an independent contractor for the LLC that you also control.
Here’s an illustration: You may engage yourself as an independent contractor to do the graphic design for the signage if you are a member of an LLC that produces signs. However, this form of organisation may not provide as many advantages.
If you opt to pay yourself as an independent contractor, you must submit an IRS Form W-9 with the LLC, and the LLC will file an IRS Form 1099-MISC at the end of the year. You will have to pay self-employment taxes on the amount earned.
You Can Opt Out of Receiving Payments
You may also choose not to pay yourself and instead keep the revenues in the LLC. Because the earnings from your LLC move through to your personal tax return, you must still pay income tax on them.