LLC Salary: Everything You Need to Know
There are certain LLC salary requirements that you should be aware of when you first form your business. 3 min read
2. Can LLC Members Take a Salary?
3. Member Management
4. Profit Distributions
5. Guaranteed Payments
There are certain LLC salary requirements that you should be aware of when you first form your business. This is because there are different ways that LLC owners can pay themselves, depending on how the business is taxed and structured. Knowing how to properly distribute your LLC's income will determine the long-term success of your business.
LLC Salary: Overview
Being the newest addition to the types of businesses you can form, an LLC, or "limited liability company," is a desirable entity to both form and operate. Owners are referred to as members and enjoy limited liability protection. There is no limit to the number of members, and single-member LLCs are possible.
By forming this type of business, the owners benefit from plenty of flexibility. Based on this level of flexibility, LLCs are incredibly popular. However, one question is commonly asked, "As an owner, can I pay myself a salary?"
The answer to this question is that it depends on how your LLC is taxed.
For example, will your LLC be taxed as a partnership, C corporation, or S corporation? If you elect to be taxed as an S corporation, you will continue to operate as an LLC but will adopt a new approach in regards to taxation.
Can LLC Members Take a Salary?
Under the federal tax code, if you form an LLC with more than one member, you will be taxed as a partnership by default. This means that if you are operating a single-member LLC, you will be taxed as a sole proprietorship.
In this case, all of the LLC's income is taxed and reported on each member's personal tax return. So paying salaries to members would essentially just shift income without adding any significant benefits.
In most states, LLC members are seen as investors, rather than employees. Although a member may actively engage in managerial activities, this classification does not generally change. Unless a member meets specific employee requirements, any salary payments will be considered a profit distribution.
As an LLC owner, you will typically have the right to participate in the management of your company. However, in certain situations, a member can be classified as an employee. This will require other members to delegate select management tasks to that specific member.
For example, say that you partially own a 30-member LLC. If two members are given specific duties and oversee daily operations, something which the other members don't do, these two members could receive a salary. There are stipulations, so make sure you understand the requirements associated with paying members a salary.
When an owner invests in an LLC, they expect a return on their investment. This is typically through membership interest and the distribution of company profits. It is important to note that LLC members cannot demand that profits be distributed. However, if the LLC does distribute profits to some members, those who did not receive payment can make a legal claim as a creditor.
Also, unlike employees, even if members do not receive a distribution, that income will be subject to personal income tax. After all, an LLC is a 'pass-through' entity.
The IRS does acknowledge services provided in the capacity of a partner. However, if a partner provides services that are outside of their capacity as a partner, they will receive guaranteed payments.
In this case, the partnership deducts these payments from the company's income. In turn, this reduces the amount distributed to each individual member. The partner then reports these payments as standard income. This means that the individual member will need to pay self-employment taxes on guaranteed payments, while the LLC will save on FICA taxes.
Understanding how to distribute company profits can be rather complex, especially when there are multiple members involved. Depending on the role of each member, it may be ideal for you to process payments in varying ways. Once again, this will all depend on how your LLC is set-up in terms of taxation. If you are unsure about your current financial duties, speak with a professional asap. This will save you a mountain of headaches in the future — especially during tax season.
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