How do I as sole member of my LLC with the S-corp election pay myself? Do I need to set up a payroll and go through that process?
– Brian, Colorado
When taxed as an S-corp, there might actually be an advantage in terms of Self-Employment tax by paying yourself as a W-2 payroll employee.
Each active member of an LLC which is taxed as a partnership owes Self-Employment tax on his or her share of the LLC’s net income.
If your LLC is taxed as an s-corporation, you will pay Self-Employment tax on the portion of your LLC’s net income that you receive in salary.
The rest of your income you can choose to receive as dividends–which has no Self-Employment tax.
Now, I already know what you’re thinking…”I’ll pay myself a salary of $0, and treat all my income as dividends, and therefore owe no Self-Employment tax.”
Well, guess what, the IRS already thought of that, and they require that owners of s-corporations (or LLCs taxed as s-corporations), pay themselves a “reasonable salary”.
What is a reasonable salary?
Whatever the agent auditing your LLC decides is reasonable….ok, that’s a bit cynical.
You are probably safe if you pay yourself a salary at or above the average for the job that you do for your company, in your area.
In terms of the logistics of paying yourself, you would use a payroll service for wages (salary), and a check for your dividends. No withholdings are needed on dividends, though they are on wages.
Wages/salary are deductible from the LLC’s profits as a business expense. Dividends are not deductible.