How to Pay Yourself LLC

How to pay yourself LLC? The two ways to pay yourself in an LLC are through the LLC's profits and as an employee. If you choose to pay yourself via profits, then it is important that this is made clear during the LLC's formation. If you choose to be paid as an employee, then you can choose to be paid as an independent contractor or an actual employee depending on your tax situation.

How to Pay Yourself in a LLC: Employee Wages

Any active member of the LLC is eligible to be paid for wages. The threshold to be considered an active member of the business is over 500 hours worked annually. However, if an LLC member only has invested but is not considered active, then he or she is not eligible to receive any wages. However, they are eligible to receive distributions from the LLC's profits.

How to Pay Yourself in a LLC: Profits

All LLC members are able to receive compensation in the form of year-end profit distribution whether they are active or not. Typically, the payout structure reflects each member's ownership stake in the LLC. However, the precise payout ratios are determined during the formation of the LLC. For example, instead of an active member receiving wages, he can receive a higher payout ratio than other inactive members. All profits from the LLC are taxed as income and shown on personal income tax returns.

How to Pay Yourself in a LLC: Draws

A draw is appropriate when LLC members want to receive payment of their profits at regular intervals rather than at year-end. It is important to note that these are not wages. These funds come from the LLC's capital accounts. By the end of the year, the drawdown in capital accounts from the draws should match the accumulated profit.

Every time an LLC member receives a draw, their capital account will decrease by that amount. Once your company's fiscal year or calendar year has ended, profits will be accounted and the capital account will increase. Essentially, when an LLC member receives a draw, they are requesting an advance payment based on the company's expected profits at the end of the year.

How to Pay Yourself in a LLC: Forms

The IRS forms that need to be filed depend on how the LLC chooses to pay its members. If members are:

  • Paid as independent contractors, then the member will file Form W-9 with the LLC, and the LLC will file Form 1099-MISC at year-end with the IRS.
  • Paid as an employee, then Form W-4 needs to be filed in order to calculate payroll tax withholding. Then, the LLC pays the member as a W-2 employee.

How to Pay Yourself in a LLC: Taxes

For any members who are paid as employees, the LLC must withhold income and employment taxes. However, if the member is paid as an independent contractor, then the LLC does not have to pay employment taxes. Instead, the member will be responsible for paying a self-employment tax on personal income taxes. Any distributions from the LLC at year-end have to be listed on the income tax returns and are taxed as personal income.

If your LLC is member-managed, the IRS has very specific rules for how much managers should be paid. For starters, you must be sure that the wage you are paying your member managers meets standards for the industry in which your LLC operates. For member managers, your LLC will need to pay both payroll taxes and withholding. The member managers should report the wages they receive for management duties as earned income on their individual returns.

When LLC members are allocated company profits on top of the salary they receive for working in the company, they should report these profits as passive income. Employment taxes do not apply to passive income, which is also called unearned income. That said, this income will be subject to some taxes.

How to Pay Yourself in a LLC: Incentives / Bonus

For LLCs, salaries above $1 million are not deductible. Therefore, the only way to pay an employee more than a $1 million salary is by making it “incentive based.” This means that the employee must meet some sort of predetermined objective in order to receive this incentive pay. Bonuses above $1 million are withheld at a 39.6 percent rate while bonuses below $1 million are withheld at a 25 percent rate.

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