Did you know that 66% of small businesses significantly struggle financially? Based on these statistics, it’s likely that you’re struggling yourself as an entrepreneur.
For many, something as simple as getting your financial situation in order is all it’d take to turn things around. And we don’t mean something as drastic as bringing in significantly more revenue. Instead, you should start paying yourself if you aren’t already doing so.
Want to learn how to pay yourself with an LLC? Then keep reading. We’ll show you why you should do it and the options available to you.
Why Should You Pay Yourself With an LLC?
Things may have worked out relatively well so far, so why should you shake things up? These are some of the biggest reasons why you should pay yourself with an LLC.
You’ll Get Compensation for Your Work
Just because you’re the LLC owner doesn’t mean you have to pour your blood, sweat, and tears into it for nothing. You’re entitled to compensation for everything you’re investing in the business.
Paying yourself establishes the value of your work. Plus, it’ll help you track the true profitability of your company.
You’ll Separate Personal and Business Finances
An LLC specifically provides personal liability protection, but this can only be maintained if your personal and business finances are separate. By properly paying yourself from the LLC, you’ll make sure that the separation between personal assets and business obligations is there.
Be aware that mixing funds can jeopardize this protection. So it’s important that finances are separated and stay that way.
You’ll Have Tax Compliance
The IRS requires that LLC owners account for income correctly. Paying yourself ensures that you meet tax obligations based on the LLC’s structure.
Depending on how your LLC is taxed, paying yourself as a draw, distribution, or salary can help determine the taxes owed (such as income tax, self-employment tax, or payroll taxes). Also, some states require you to receive reasonable compensation if the LLC elects S-corporation status for tax purposes.
If these reasons have convinced you to pay yourself with an LLC, then you’ll have to create one first. Luckily, we have a free business registration service you can take advantage of. You’ll only have to pay for the state fee, and the rest is truly free.
How to Pay Yourself With an LLC
So how do you pay yourself from an LLC? Well, the answer depends on how your LLC is taxed and how many members are in the company. Here’s an explanation of each scenario.
Single-Member LLC
By default, single-member LLCs are treated as disregarded entities. This means that the LLC’s profits and losses flow through to your personal tax return, and there are two main ways for how to pay yourself with a single-member LLC.
First, you can do an owner’s draw, which is where you withdraw money from the company’s profits. You’ll transfer funds from the business bank account to your personal one, with the label “owner’s draw” in your records. You’ll then pay income taxes and self-employment taxes (Social Security and Medicare) on the LLC’s net profits, not on the draw itself.
The other option is to treat your business as an S-corporation, and you’ll have to pay yourself a salary. Set up payroll and pay yourself regularly like an employee. The salary is then subject to payroll taxes, but you only pay self-employment taxes on the salary, not the remaining LLC profits.
Multi-Member LLC
The IRS automatically treats multi-member LLCs as partnerships unless you say otherwise. Your main payment option here is through distributions.
Each LLC owner withdraws their share of the profits as per the partnership agreement by transferring it from the LLC’s bank account to their personal account. The profits are reported on your personal tax return via a Schedule K-1 form and are subject to income tax and self-employment tax.
If applicable, you can make guaranteed payments as well. This is where fixed payments are made to the LLC owners for services or capital investment, regardless of profits.
These payments should be in the operating agreement, and they’re issued through the LLC’s bank account. The payments are taxed as ordinary income.
C-Corporation
With a C-corporation, there are also two ways you can pay yourself.
The first option is to pay yourself a salary through the company’s payroll system. As a result, this income will be subject to payroll taxes.
The other route is to distribute dividends from after-tax profits. However, the downside to this is that you’re subject to double taxation (corporate income tax and personal tax on dividends).
Can I 1099 Myself From My LLC?
Another choice you may be wondering about is the 1099 form, which is used for income outside of wages, salaries, and tips. Typically, independent contractors use this form.
The good news is that you can pay yourself as an independent contractor, which means you can 1099 yourself. Technically, you’d file Form W-9 with the LLC, and then the LLC would file the 1099.
Protect Your Finances by Paying Yourself in an LLC
Maintaining separate personal and business finances is vital if you want to keep the personal liability protection offered by LLCs. By knowing how to pay yourself with an LLC, you can achieve this, plus enjoy many other benefits.
To determine the best payment structure, speak to an accountant or attorney. Tax laws can vary by state and situation, so having their help can make all the difference.
Sign up with Business Anywhere today to use our free business registration service. We have experienced and knowledgeable staff who can assist with any questions you have.
