If you own an LLC, you might wonder if you can pay yourself on payroll. The answer depends on how you choose to pay yourself, like taking a salary or making regular payments. Each option has different rules and tax effects. Knowing these can help you decide the best way to pay yourself and manage your business money.
Ways to Pay Yourself as an LLC Owner
As an LLC owner, you can pay yourself in different ways. You can take money out of the profits, get a salary if you have an S-Corp, or get guaranteed payments. Each way has its own tax rules and requirements, so it’s important to understand them before you choose.
Owner’s Draw/Distributions
One way to pay yourself is by taking money out of the profits, called an Owner’s Draw or Distribution. This is common for single-owner LLCs or multi-owner LLCs treated like a partnership. You can take money whenever you need it without being on the payroll.
One big benefit is that these draws aren’t subject to payroll taxes (FICA) if your LLC is an S-Corp. But, if your LLC is not an S-Corp, you will still pay self-employment taxes on all your business income.
Make sure you follow your LLC’s rules for taking draws and keep enough money in the business to stay healthy financially. This helps keep your business and personal finances in good shape.
W-2 Salary
You can only pay yourself a salary through payroll if your LLC is an S-Corp. By doing this, you get a W-2 like a regular employee. This helps set up a formal way to pay taxes correctly.
Paying yourself a salary can have tax benefits if your LLC is an S-Corp. Only your salary is subject to self-employment taxes, which might save you money. This can be a good way to stay within tax rules and save money.
To figure out a fair salary, consider your role, what others in your industry make, and your LLC’s money situation. Talking to a tax professional can help you set the right salary.
Guaranteed Payments
Another way to pay yourself is through guaranteed payments, which means you get paid regularly no matter how much profit your LLC makes. This is similar to a salary for multi-owner LLCs.
Guaranteed payments are counted as business expenses and give you a steady income. This is helpful if your business has ups and downs in profits. Make sure to set clear rules for these payments in your LLC’s agreement. A financial advisor or tax professional can help decide the right amount for these payments.
LLCs without an S-Corp Election
If your LLC hasn’t chosen to be an S-Corp, you usually pay yourself through draws or distributions, and all your business income is subject to self-employment taxes.
Extra Payroll Taxes
If you put yourself on payroll without an S-Corp election, you’ll have to pay extra taxes without getting any real tax benefits. This includes federal and state unemployment taxes, which won’t give you any tax savings.
No Tax Advantage
Without an S-Corp election, paying yourself a salary doesn’t change your tax situation. Your business profits will still be taxed on your personal tax return, so setting up payroll doesn’t give you any tax advantage.
Compliance Burden
Putting yourself on payroll without an S-Corp election means more paperwork and tax filings. You’ll have to follow federal and state rules, including withholding and paying payroll taxes, filing payroll tax returns, and issuing W-2 forms. This adds more complexity to your business. Taking draws or distributions can make things simpler and reduce the paperwork.
LLCs with an S-Corp Election
If your LLC is treated as an S-Corp for tax purposes, you must follow IRS rules to keep this status. This can help you save on taxes compared to being taxed as a sole proprietorship or partnership.
IRS Requirement
If your LLC is an S-Corp, you must pay yourself a reasonable salary for the work you do. The IRS requires this and not doing so can lead to penalties. A reasonable salary should match what others in your industry make for similar work. This keeps you in line with tax rules and protects your S-Corp status.
Tax Savings
Paying yourself a reasonable salary as an S-Corp owner can save on self-employment taxes. The rest of the profits can be taken as distributions, which aren’t subject to these taxes. This strategy helps you save money over time.
Compliance
Following IRS rules means paying yourself a reasonable salary through payroll and filing the right tax forms. This shows that you are compensating yourself fairly and staying within tax laws. Keeping detailed records of your salary and how you determined it is important for compliance.
Conclusion
To sum up, as an LLC owner, you can pay yourself through a W-2 salary (if you have chosen S-Corp status) or guaranteed payments. The best way depends on tax rules, your business setup, and your financial goals. Understanding these options helps you make smart decisions for your business and personal finances.
