When forming a limited liability company (LLC), you may be concerned with how to pay yourself so that you can profit from the company's success. Payment options include a salary, a draw, a guaranteed payment, and profit distributions.
Paying yourself a salary
If you choose to pay yourself a salary from the LLC, you need to be hired as an employee. The LLC deducts the salary as a business expense and withholds taxes and FICA.
This is true whether your LLC is organized as a sole proprietorship, partnership, C corporation, or S corporation.
Reasonable compensation
If your LLC is organized as an S corporation and you hire yourself as an employee, you must be sure that your salary is commensurate with the amounts paid to similar professionals in your field in your region.
This Internal Revenue Service (IRS) rule prevents you from maximizing your income through distributions and avoiding employment taxes for your salaried role.
Some tax professionals recommend paying yourself 60 percent in salary and 40 percent in dividends to stay clear of IRS problems unless this means your salary would be too low compared to others in your field.
If your LLC is a C corp., reasonable compensation plays the other way. The IRS wants to make sure the compensation is not unreasonably high to absorb taxable income so that the employee does not avoid taxes on what would otherwise be paid out as a dividend.
Distribution of profit
LLCs that are formed as partnerships and sole proprietorships distribute their profit to members in a distribution, with each member receiving a distribution equal to their ownership position.
For example, if you own one-half of the LLC, you receive one-half of the profits. The LLC reports distributions using the Partners' Share of Income, Deductions, Credits, Etc. (Schedule K-1), which is given to the members.
Members then report the distribution income on their own U.S. Individual Income Tax Return (Form 1040) with Supplemental Income and Loss (Schedule E) attached.
LLCs that are corporations pay dividends to stockholders. A C corp. pays taxes on its profits, then the shareholders pay taxes on their dividends.
An S corp., on the other hand, is a pass-through entity like a sole proprietorship or partnership, so the corporation does not pay corporation taxes. Shareholders in an S corp. pay tax on their dividends.
Draw as payment
Another option for getting paid is to receive a draw, which is basically an advance on the profit distribution paid out of the member's equity share of the company.
A draw is often used when a member needs regular income and doesn't want to wait for profit distributions. When profit is distributed to members, the draw is paid back in full and the member receives whatever profit is left.
So, if a member received a draw of $500 per month ($6,000 per year) and the profit distribution for that member totaled $6,500, $6,000 would be kept by the LLC as a payback on the draw and the member would receive $500. The member reports the draw on their taxes as if it were a distribution.
Guaranteed payments
If you need an ongoing income from your LLC but don't want to become an employee, guaranteed payments may be the best option. A guaranteed payment is a tax-deductible expense for the LLC that is subject to estimated income tax and self-employment taxes for the member.
Guaranteed payments are made whether or not the LLC is profitable, which can ease your financial burden while you are waiting for the business to take off.
The type of payments you choose for your LLC have important tax ramifications, so they are worthcareful consideration.
Find out more about Starting Your LLC
FAQs
If you own a single-member LLC, you don't get paid a salary. Instead, you'll take an owner's draw from the profits earned by the company. The easiest way to do this is to write yourself a check from the business bank account and deposit it into your personal account.
How should I pay myself from my LLC? ›
You can take money out of your business account in any form you want—e.g., cash, paper or electronic checks, ACH payments, PayPal or Venmo. However you do it, you're responsible for applicable income and self-employment taxes on your business income. A payroll service can significantly simplify this process.
How do I write a check to myself from my LLC? ›
Yes! Writing a check to yourself from your business is the same as writing a check to another recipient. On the payee line, you'll just write your own name instead of the name of another vendor.
How to transfer money from LLC to personal account? ›
That's called an owner's draw. You can simply write yourself a check or transfer the money for your business profits from your LLC's business bank account to your personal bank account. Easy as that!
Do I need to give myself a 1099 from my LLC? ›
To 1099 yourself from your LLC means to treat yourself as an independent contractor. In this case, you receive payment for independent work on the business. Companies must give a 1099 to all independent contractors who earn more than $600 annually, and it's no different when you 1099 yourself.
What is the best way to pay yourself as a business owner? ›
Business owners can pay themselves through a draw, a salary, or a combination method:
- A draw is a direct payment from the business to yourself.
- A salary goes through the payroll process and taxes are withheld.
- A combination method means you take part of your income as salary and part of it as a draw or distribution.
For many individuals, an owner's draw is classified as income and may be subject to federal, state, local, and self-employment taxes, so it's important to plan ahead before filing taxes.
What is it called when I pay myself from my LLC? ›
Take an Owner's Draw (Profit Distributions)
Any owner of an LLC can be paid through profit distributions. Profit distributions are when the business profits get distributed among the members rather than reinvested into the business. These are sometimes called owner's draws.
Can I deposit my LLC check into my personal account? ›
No, you should not deposit a check that was made out to a business into a personal account. While it may seem convenient to use both business and personal checking accounts interchangeably, it is never worth the potential problems involved.
Can I cash a check from my LLC? ›
If you have a business bank account with your company's name and your name as the owner or authorized agent, you can usually cash the check at a local branch by endorsing it and verifying your identity.
File as an S corporation
LLCs have the option of filing as an S corp., the main benefit of which is it provides a mechanism for reducing self-employment taxes. Under an S corp structure, the owner of an LLC can be considered an employee and receive a salary.
Can you spend money from LLC? ›
2) Operating Expenses
Taking money out of an LLC can help cover personal expenses, such as housing, education, or medical bills.
How do I give personal money to my LLC? ›
LLC Capital Contributions
This can be done in a variety of ways, such as writing a check or transferring funds from a personal account to the LLC's account. If you're going to use capital contributions to fund your LLC, it's important to document the transaction.
Is it good to pay myself from my LLC? ›
One advantage of paying yourself a salary as a member is that wages are considered operating expenses for the LLC, enabling members to deduct them from the LLC's profits for tax purposes. The IRS only allows reasonable wages as a deduction for corporate tax.
How much should I pay myself from my business? ›
To determine your salary, you need to first estimate your company's annual gross revenue and subtract all operating costs, such as rent, employees' salaries, inventory and supplies. Make sure to set aside extra to cover emergency expenses or business debt, such as payments for a small business loan.
What is reasonable compensation? ›
Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circ*mstances. Reasonableness is determined based on all the facts and circ*mstances.
How do I spend money from my LLC? ›
The easiest way to do this is to write yourself a check from the business bank account and deposit it into your personal account. The other option is to transfer funds from your business bank account into your account. Whichever method you choose, be sure to save all of the necessary details for tax purposes.
What percentage should I pay myself from my business? ›
Small business owners should pay themselves a salary when their businesses are profitable. Base your salary on your net business income, after setting aside 30% for taxes. Divide the remaining income into a salary for yourself and your business savings.
Do I have to pay taxes on money I put into my business account? ›
You pay tax on your business income (profit) regardless of whether you leave it in the business account or move it to a personal account to spend it.
Can I take money out of my business account for personal use? ›
The short answer to the question is yes, individuals can withdraw funds from their business account for personal use; however, a detailed explanation is necessary to understand the intricate process of safely withdrawing money without significant financial consequences.
