Owning an LLC and paying yourself is a usual practice in the world of business people. The two options below are the most usual approaches:

  • Consider yourself an employee of the LLC and pay yourself salaries.
  • Consider yourself a member of the LLC and share in its profits.

Salaries

Generally, the LLC pays wages regularly as the employee performs his duty. However, it doesn't distribute profits to its members until the year ends. Periodic draws can be pulled by members from the LLC, though. Basically, a draw is a withdrawal of expected annual profits before time. In order to pay yourself wages from your LLC, you have to be actively functioning in business. You need to have a real role with productive obligations as an LLC owner.

If the LLC has many owners who contribute equally to its success, it won't be fair to pay one salary and not pay the rest. But if it's an LLC with only one person serving as administrator, the administrator should be paid salaries without paying salaries to other members. The salaries of employees are treated as part of the LLC's operating expenses and will be deducted from its revenue.

There's a need to file IRS Form W-4 to verify the amount of payroll withholding from every check you get. You'll be paid as a W-2 employee by the LLC, which will also withhold employment and income taxes from your paycheck. That means you'll pay income tax on the wages you earn.

Profits

Every member owns a part of the LLC in percentage, which is known as a capital account. The distribution of year-end profits is based on that percentage. Therefore, if a four-member LLC's annual profit is $100,000 and each member owns 25 percent, each member will receive $25,000. An LLC's member can set up a draw to get continued payments as a draw against the annual profit.

If your anticipated year-end profit is $12,000, you can make arrangements for draws that pay you $1,000 every month. Then, the total monthly draws for 12 months will be deducted from the total year-end profit. Therefore, if your draws paid you a total of $12,000, but you ended up having $15,000 as your total share of annual profit, you would receive $3,000 at the close of the year.

Taxes

If it's a one-member LLC, the owner will pay income tax on her distributions and will report the profits and losses of the organization with her tax return by filing Schedule C. If you decide to pay yourself as a contractor, you have to file Form W-9 of the IRS with the LLC, and the LLC will file IRS Form 1099-MISC at the close of the year.

The IRS requires operators of partnerships to file annual returns to report their income, deductions, profits, and losses. However, the partnerships don't pay income tax. Instead, they have an arrangement to pass-through profits and losses to their owners. Each member of a partnership includes his or her portion of the partnership's revenue or loss on his or her personal tax return.

The owner of a one-member LLC or a sole proprietor can draw funds from his organization whenever he likes. That means he gets his salaries directly from the gains of the business. If you're the only member of your LLC or a sole proprietor, you are not seen as an employee who earns income by receiving regular paychecks. That means no Medicare, Social Security, state income taxes, or federal income taxes are withheld directly from your income. Instead, you must pay an estimated amount of these to the IRS manually every quarter since the profit of the business is the source of your income.

Managing Taxes

Partners shouldn't be issued a Form W-2 because they're not employees. The partnership has to provide copies of Schedule K-1 (Form 1065) to its members on or before the due date for filing Form 1065, including extensions. An LLC can apply to become a corporation by filing Form 8832 for reasons of taxation. Corporations are taxed twice in the following two ways:

  • When the corporation files Form 1120, it is taxed at the corporate level.
  • When dividends are distributed to its shareholders, it is taxed at the individual level.

Therefore, corporations look for ways to reduce taxation in the way they pay their shareholders. They issue payroll checks and withhold employment taxes as a means of shifting some of the income to their shareholders, which makes the corporation responsible for only the payroll taxes to be paid on the wages.

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