Forming a limited liability company, or LLC, can be a great way to organize your company and protect yourself from liability. However, you still need to earn a living, so you may be wondering, "How to pay myself from my LLC?"
The two most common options are to treat yourself as an employee with wages, or to treat yourself as an LLC member and receive distribution from the profits.
Paying Yourself as a Wage Earner
Paying yourself from an LLC as an employee allows you to receive regular compensation that you can plan on throughout the year, which can be very helpful if you are seeking a regular income.
To be able to pay yourself wages or a salary from your single-member LLC or other LLC, you must be actively working in the business. You need to have an actual role with real responsibilities as an LLC owner.
Where there are multiple owners, if all of the LLC members participate equally in the operation of the business, you can't pay one a salary and not the others. However, if you are the only member that has a management role, you can pay yourself a salary without setting up salaries for the other participating LLC members.
Employee wages are considered operating expenses for the LLC and will be deducted from the LLC's profits. The Internal Revenue Service (IRS) only allows reasonable wages as a deduction, so be sure any salary you pay yourself is within industry norms. You can also issue bonuses to LLC members who are employees, including yourself. Again, these must be reasonable related to the salary being paid.
You'll need to file IRS Form W-4 to determine the amount of payroll withholding from each paycheck you receive. The LLC will pay you as a W-2 employee and will withhold income and employment taxes from your paycheck. You will pay income tax on your wages earned.
Receive Distributions from LLC Profits
Another option for how to pay yourself in an LLC is to receive distributions of profits from the LLC each year. Each member owns a percentage of the LLC, called his or her capital account. Year-end profit distributions are made based on that percentage. So if the LLC had $100,000 in profit and you and the other member each own 50%, you can each receive $50,000.
You also could set up a draw to receive ongoing payments as a draw against the year-end profit. If you expect your percentage of the year-end profit to be $12,000, you could set up a draw to receive $1,000 each month. The total of all the draws throughout the year are deducted from the total year-end profit. So if your draw for the year totaled $12,000, but your share of the profit ends up being $15,000, then you would receive $3,000 at the end of the year.
If you are the only member of the LLC, you will pay income tax on your distributions and you will file Schedule C to report the profits and losses of the LLC with your personal tax return. If there is more than one member, the IRS treats the LLC as a partnership and you each report your share of the profit and pay income tax on that. The LLC will file IRS Form 1065 to report how profits are divided among the members.
It's important to note that receiving a salary and receiving year-end distributions are not mutually exclusive. If you get a paycheck, you're still a member of the LLC and entitled to your year-end distribution.
Work as an Independent Contractor
A third option for paying yourself is to hire yourself as an independent contractor, doing work for the LLC you also own.
Here is an example: If you are a member of an LLC that prints signs, you can hire yourself as an independent contractor to do the graphic design for the signs. This type of arrangement may not offer as many benefits, though.
If you choose to pay yourself as a contractor, you need to file 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 be responsible for paying self-employment taxes on the amount earned.
Choose Not to Receive Payments
You also have the option to not pay yourself anything and to leave the profits in the LLC. You still will need to pay income tax on the profit earned, since the profits from your LLC pass through to your personal tax return.