How to Pay Yourself as an LLC Owner

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How to Pay Yourself as an LLC Owner

How to pay yourself as an owner of an llc

Starting your business is an exciting time, and one vital part of that is knowing how you're going to pay yourself. Once the money's coming in, just how do you get it out of your LLC? Depending on the type of LLC you run, you have a few different options.

We'll cover the various ways you can take money out of your business and the implications for doing so. You'll understand the key concepts for how to pay yourself as an LLC owner so you can optimize your earnings, pay your taxes and ensure the financial security of your business.

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Using Your Business Bank Account to Pay Yourself

Before we get into determining the method you should use to pay yourself, let's talk about how the money will actually get to you. Paying yourself as an LLC owner means moving money from the LLC business bank account to your personal account.

You’ll use your business bank account to take in revenue, hold money and pay expenses. When you pay yourself as an LLC owner, you move money from your business bank account into your personal one. 

You have a couple of ways to move this money. In most cases, you’ll make a simple money transfer between your business account and your personal one, although sometimes you may use a payroll service to do so. 

Of course, the IRS is also going to want their cut!

Paying Taxes on LLC Profits

One important area to understand as an LLC owner is the taxes you'll owe. Generally, you will pay taxes on your profits, whether you use them to pay yourself, keep them in the business or do something else with them. You don’t need to take money out of your LLC to incur or pay taxes. So, if your LLC has revenue of $150,000 and expenses of $50,000, you pay taxes on the $100,000 profit. It doesn’t matter if you transfer $0, $50,000 or $100,000 of that as pay between your business and personal bank account — you’ll still pay taxes on the whole amount.

If you pay yourself through a payroll system, there is an exception to this, as there are a couple of taxes (FUTA and SUTA) that you only pay on the salaried amount you pay yourself. But, if you’re not using a payroll system and paying yourself through distributions, that tax is the same whether the money is in your personal account or your business one.

3 Ways to Pay Yourself as an LLC Business Owner

So you're ready to get that money rolling in. Here are the three options LLC business owners have of paying themselves:

  • Distributions or an “Owner’s Draw,” where you move money directly between your business account and your personal account
  • Salary, where you run payroll on a regular basis and you or the payroll system transfers the money, less taxes, between your business and personal account
  • A combination of distributions/owner’s draw and salary/payroll

how-to-pay-yourself-as-LLC-ownerHere's when to use each of these.

When to Pay Yourself Using a Distribution or Owner’s Draw

You will normally use a distribution or owner’s draw to pay yourself if:

  • You are a single-member LLC taxed as a sole proprietor, and you file a Form 1040 together with a Schedule C and a Schedule SE to report your taxes each year.
  • You are a multi-member LLC taxed as a partnership, and you file a Form 1040 together with a Schedule K and a Form 1065 to report your taxes each year.

You do not need to use a formal payroll system, as any business profits will “pass through” to your personal tax return where you’ll calculate and pay taxes.

In both of these cases, you can just use distributions to pay yourself. You do this by simply transferring the money from your business account to your personal account and showing the transaction in your bookkeeping system as a distribution or owner's draw.

When you pay yourself using a distribution, there are no taxes withheld from the payment amount. This means you will need to calculate and pay estimated taxes on your business profits on a quarterly basis. You will typically owe and need to pay estimated amounts for self-employment tax, federal income tax and state income tax. 

When to Pay Yourself Using a Salary and Payroll System

Most LLC owners will only use a salary and payroll system to pay themselves if:

  • You are a single- or multi-member LLC that has chosen to be taxed as an S Corporation, and you file a Form 1120-S together with your Form 1040 to report your taxes each year. You will also file a W2 and other payroll tax forms.

If you’re an LLC that’s chosen to be taxed as an S Corporation, you must pay yourself a “reasonable salary” through your payroll system. 

Before you can do this, you will need to set up a payroll service using software like Gusto, Paychex, ADP or Patriot. Alternatively, your accountant may be able to set up and run payroll on your behalf. Once you have a payroll system, you will run payroll on a regular basis and transfer the money as directed. You will show all of your payroll transactions in your bookkeeping system.

When you pay yourself through a payroll system, that system will calculate any self-employment, federal income, state income, FUTA and SUTA taxes that you might need to pay. Full-service payroll systems will also file the relevant tax forms, withdraw the taxes and pay them on your behalf.

Keep in mind that owners of LLCs taxed as C Corporations will also use payroll systems to pay themselves, but tax management and implications for C Corps are involved and complex. In these cases, we recommend speaking to your accountant. 

When to Combine Distributions and Payroll to Pay Yourself

Some LLC owners may choose to combine paying themselves through payroll and with a distribution. This will normally be because you’ve chosen to be taxed as an S Corporation. In these cases, you won’t pay self-employment tax on the distribution amount, which will provide a tax saving.

If you go down this route, you will still need to calculate and pay quarterly estimated federal and state income taxes on any money you took out through the distribution method.

Frequently Asked Questions on Paying Yourself as an LLC Owner

Still have more questions? Here's a quick look at some common areas.

How do I pay myself as a single-member LLC owner?

If you’re taxed as a sole proprietor, use a distribution to pay yourself. If you’re taxed as an S Corp, use a payroll system with an option to also pay part of your salary through a distribution. 

How do I pay myself as a multi-member LLC owner?

If you’re taxed as a partnership, use a distribution to pay yourself and your partners based on the ownership percentage set out in your operating agreement. If you’re taxed as an S Corp, use a payroll system with an option to also pay part of your salary through a distribution. 

How do I pay myself as a Series LLC owner?

Owing a Series LLC does not change the way you pay yourself. Use the guidance based on whether you’re a single- or multi-member LLC or you’re taxed as an S Corp.

Should an LLC owner take a salary?

You only need to “take a salary” if you’re paying yourself through a payroll system. You would normally do that if you’re being taxed as an S Corp. If you’re taxed as a sole proprietor (single-member LLC) or a partnership (multi-member LLC), then you don’t normally need to take a salary. Instead, you would take a distribution or owner’s draw.

Can LLC owners pay themselves through payroll? 

You would typically only pay yourself through payroll if you’re being taxed as an S Corp. If you’re taxed as a sole proprietor (single-member LLC) or a partnership (multi-member LLC), then you don’t normally need to pay yourself through a payroll system. Instead, you would take a distribution or owner’s draw.

Remember that you’ll also need to practice good financial management for your LLC. Pay attention to seasonal trends and the impact on your revenue and profits. Keep enough money in your business to meet all of your commitments, and carefully consider how much you pay yourself versus your upcoming expenses. 

If you need help with your bookkeeping and taxes, Incfile can help. We provide a complete Accounting and Bookkeeping service to stay on top of your finances and remove the stress and hassle of paying your taxes.

Bookkeeping & Accounting | Incfile
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