Can You Be an Employee of Your Own LLC
Its an important question that many business owners may ask themselves if they wish to seek compensation for their day-to-day operations of the business.3 min read
3. Limited Liability Company
4. How to Take Pay?
5. Salary versus Draw
6. Married Couples
7. Consider Incorporating
"Can you be an employee of your own LLC?" is an important question that many business owners may ask themselves if they wish to seek compensation for their day-to-day operations of the business. The ability to be an employee of your own business depends on a lot of factors including the type of business.
Partnership or Sole Proprietorship
When your business is classified as a partnership or a sole proprietorship you are allowed to be an employee on the payroll. You are allowed to pay yourself from the business income, though it will not be tax-deductible income. While there are multiple ways to pay yourself in a partnership, the easiest way is to take a distribution and make estimated tax payments throughout the year.
In both these business entities, you will pay your self-employment tax on the total amount of the business profit for the year which averages out to about 15 percent of the net profit. This makes it essential to make estimated tax payments throughout the year to avoid a huge tax bill at the end. While taking regular payment for yourself is not necessary it can keep you more organized than taking varying amounts out when you need it.
In a corporation, the way you pay yourself will depend on the type of corporation your business is. If you are a part owner of a C corporation, you will be considered a W-2 wage earner as an officer of the corporation and be subject to taxes based on what you make for the year. If you have an S corporation, you have the ability to pay yourself through a tax-free distribution, but you will need to take a reasonable salary which you will be required to pay taxes on.
Limited Liability Company
Since an LLC is run by state laws and not federal laws, your S corporation will default to a status of a sole proprietorship if there is one owner or a partnership if there are multiple owners for taxes purposes. You do have the option to opt for your LLC to receive the S corporation tax designation to take advantage of the more beneficial taxes as long as it meets the minimum requirements.
How to Take Pay?
When you have an LLC, you can simply pay yourself by taking money out of the business account. To keep a record of the transaction, accountants recommend that you write a check from the company account to your personal bank account. This will help keep business and personal expenses separate. It is important to remember that even if you don't take profits out of your company, you still will be required to pay personal tax on it.
Salary versus Draw
When distributing profits from your LLC, it is often referred to as a draw which is a drastic difference form an hourly or salaried wage. When you are paid hourly or through a salary, your federal and state taxes are withheld and both your portion and the employer's portion of the Social Security and Medicare contribution before you receive your pay. Conversely, when you make a draw, no taxes will be removed, and you will be required to pay both the employee and employer portion of the FICA and both federal and state estimated taxes.
It can get a little more difficult to pay yourself as an employee when you are married and filing a joint return. Sometimes it is best to employ your spouse and pay them as an employee as well. This will not only give you the same income when filing a return, but their salary will be able to be deducted from the profit of the business before tax is withheld. Though if this is the route you choose you will need to make sure to obtain both unemployment insurance and workers comp for them. You should always discuss this type of plan with an attorney to make sure it can stand up to IRS scrutiny.
Sometimes the best way to take employee pay to avoid paying a high amount of taxes is to incorporate your business. This will allow you to take a salary that is considered reasonable and also give you the option of taking fringe benefits.
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