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How To Pay Yourself As The Owner Of An LLC
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I’m a single member LLC with a question about owner draws.
What is the difference between owner’s draws and guaranteed payments? I take a draw each month based on the net profit in the LLC for the month so the amount varies month-to-month. How is this treated in the LLC and are the owner’s draws considered income to me? If so, do I have to pay income taxes on the owner’s draws? If they don’t show as part of my income and are not taxable, can I show them as income to a mortgage co. for the purpose of refinancing?
Thank you in advance for your assistance.
– Susan, Connecticut
Some definitions first:
A ‘draw’ is a withdrawal of the LLC’s earnings. A member usually won’t take a draw unless there are profits.
A ‘guaranteed payment’ is money that a member takes out of the business whether there is a profit or not.
For income tax purposes you are charged with recognition of your LLC’s profits regardless of your draws. Tax recognition and flow of money are two separate things in an LLC.
If the LLC made a $20,000 profit, then you will report it through your Schedule C if the LLC is taxed as a sole proprietorship. You DO NOT report that same $20,000 a second time due to the fact that you withdrew it during the year as the owner’s draw.
In terms of showing your income to a bank, you can show them copies of your tax return which will have your Schedule C (or if you’re a multi-member LLC, copies of the 1065 and K-1).
How Do We Pay Out Distributions To Members?
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In an operating agreement for an LLC do you have to spell out exactly how and when the distributions to members are paid out or do you have to pay out your profits as they are incurred?
Example: Can I state in my operating agreement that I will pay out a certain dollar amount per month, starting on a particular date (i.e. beginning in year 3) until the member’s entire investment has been repaid plus an additional dollar amount (say double what they have paid in) and then can I make a particular date and a particular dollar amount to buy them out?
This way I know my exact cash flow to investors.
I understand that they will pay taxes on the profits of the business, but is that regardless of how much I actually distribute to them (I do know that they won’t pay taxes on return of contribution or basis) or do I need to pay them consistent with the profits of the company in addition to their return of contribution?
Thanks for this forum, these are burning questions.
– Lori, Colorado
You can (and should) definitely spell out in exacting detail in your Operating Agreement how the LLC members will be paid.
Also, a Limited Liability Company that is taxed as a partnership is permitted to distribute cash ‘unevenly’ (an amount disproportionate to the member’s ownership interest).
Remember that a member of a pass-through entity does not pay taxes based on money distributed to them, but on their proportionate share (known as pro-rata share) of the LLC’s profits or losses. An LLC is permitted to distribute losses differently among the members –e.g. a member with a 1% interest can take 90% of the tax losses in a particular year.
This can be spelled out in your LLC operating agreement.
Similar to a single-member LLC, a multi-member LLC that is taxed as a partnership or S corporation, does not pay taxes on net income. Instead of the entity paying taxes, the pass-through taxation is reported on each member’s IRS K-1 form. The amount on the K-1 can be the same or different from the amount distributed.
You can distribute money to investors even if you don’t have profits (or, conversely, you can distribute less than the full amount of profits). These payments can be characterized as interest on a loan, or as guaranteed payments.
Once you get multiple classes of members, with different allocations of profits and distributions, you really ought to get the advice of an attorney or accountant. These are not the type of operating agreements to draft on a napkin after reading something on the internet.
Can a Member of an LLC Receive a Salary?
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It is possible for a Limited Liability Company to pay members a salary, but this depends on the tax classification.
An LLC that elected to be taxed as a sole proprietorship or partnership is unable to pay its members a salary. Since the LLC is a pass-through entity, the members “salary” are the profits of the business. Instead of a salary like an employee, members can receive a draw from the LLC. This may subject the members to paying quarterly federal estimated tax payments.
An LLC that elected to be taxed as a corporation can pay its members a salary that work in the business as they are considered employees. This will mean having to withhold income tax and pay a part of payroll taxes such as social security and Medicare (the employee pays part as well). The remaining business profits are distributed as dividends to shareholders. Since dividends are typically taxed less than income, it is important to ensure members are being paid a “reasonable salary”. It’s tempting to want to pay a majority of salary as dividends but that increases the risk of an audit from the IRS. The IRS test of what is reasonable varies by industry and the member’s involvement in the business activities.
Single Member LLC Pay Owner
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As a single member Nevada limited liability co is there a general rule of thumb of how much one ought to pay themselves as owner?
As a single-member LLC, you can be treated as a disregarded entity by the IRS and therefore there are no limits or requirements on how much of the LLC’s profits you can pay yourself from.
Instead, you will be taxed on all the LLC’s profits whether you take a draw or not. This is different from S-corps, where there are complicated rules on minimum salaries and “accumulated earnings tax” if you leave too much money in the corporation.
You don’t need to worry about those issues with an LLC. From a business perspective, you should probably leave enough money in the LLC to act as working capital. Again, this is a business decision, and you might choose to utilize credit rather than forgo personal income.
As an LLC, you are permitted to elect S-Corporation tax status by using IRS Form 2553. It is beyond the scope of this page to discuss the detailed pros and cons of s-corporation status for your LLC.
Generally, the pro of s-corporation status from a tax standpoint is that you could avoid Medicare taxes on the business’s income by receiving it as a dividend instead of either a salary or self-employment income. Update: The Affordable Care Act has enacted a medicare tax on dividends for many taxpayers.
The major con of s-corporation tax status is that there are restrictions on the types of owners of an s-corp and the number of owners.
Converting an ongoing business to s-corporation status can have tax consequences, so you really need to have an accountant familiar with small business accounting (NOT the guy who does 1040-EZs for 2 months a year for one of the tax-return mills) look at your situation.
What is the best way to handle my getting paid? Should I receive payroll from the LLC as an employee?
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I am a 50% partner in an LLC (it has one other partner who also has 50%). Only I will get my regular pay/fees from the LLC. After that pay and all other expenses, my partner and I each own 50% of the profits.
What is the best way to handle my getting paid? Should I receive payroll from the LLC as an employee? Or should I be an independent contractor and receive a 1099? If it is possible for me to get a 1099, then that would be beneficial as I have many other expenses associated with my work for the company that would be eligible for tax deductions.
Our Response – By working for the LLC there are two ways to be paid which would be as a salaried employee or an independent contractor. If you are an employee, there is an additional payroll expense. If you receive 1099 income, this income would be reported as self-employment and would be taxed as such. In most cases being classified is going to be taxed lower than as an employee since the payroll taxes won’t have to be paid.
If you have a separate business that is performing the work for other clients in addition to the LLC though, you should be ok, but we would recommend double checking to be sure it is eligible as an independent contractor, otherwise there could be issues in being incorrectly categorized (See IRS info on Independent Contractor vs Employee)
One member of a two member LLC received a 1099 payment. The check and 1099 was made out to the member personally – not the LLC. Can this “personal” 1099 be included in the LLC as income?
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One member of a two member LLC received a 1099 payment. The check and 1099 was made out to the member personally – not the LLC. Can this “personal” 1099 be included in the LLC as income? The payment is related to the LLC’s purpose and mission.
Answer – The short answer is yes, but it’s not recommended.
LLC’s are typically created to separate business and personal assets. Even though the work may have been legitimately for the activities from the LLC, may call that separation into question should there be an audit. Should the LLC ever be audited or sued, several factors will be evaluated, one of which is including the separation of business finances from the owner’s finances. This point becomes more important if the LLC is taxed as a corporation vs partnership or sole proprietorship.
You have two options for endorsing the check that was paid to the partner rather than the LLC.
- Write “For Deposit Only” along with the LLC’s name and account number. This is considered as a restrictive endorsement where the check can only go through the LLC’s bank account under your name.
- Write “Pay To” along with the LLC’s name and having the partner sign their name. This is called a special endorsement where you are essentially giving the check to another “person” (in this case the LLC) to deposit in this other “persons” account.
While this isn’t ideal, the funds can be deposited with the LLC. Just try to not make it happen often so the LLC’s liability protection isn’t put at risk.
A Beauty Salon Owner Wants To Form A Single Member LLC
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If a cosmetologist decides to purchase a salon and forms a a Single Member LLC would she continue to use schedule C for both her income as a cosmetologist working in the same salon and income from the Single Member LLC.
The salon is set up by where the income is produced by renting booth space to cosmetologist that are independent contractors.
Would she have to pay booth rent to the LLC her self since that is the way the LLC produces income, or is that commingling funds? This salon will have no employees.
– Shelia, Indiana
I would suggest having the salon owned by the LLC…that way if someone is injured at the salon, the owner is the LLC, and not the individual.
The individual would then pay booth rent to the LLC. That is NOT commingling. In fact, not paying rent, and simply treating LLC property as her own would be evidence of commingling assets.
Remember–you and your LLC are separate entities. Would you let your next door neighbor use the LLC’s booth without paying rent? Then what gives you the right to use the booth without paying rent?
This is a common arrangement.
XYZ, LLC and ABC, LLC are both owned by John Smith. XYZ owns the real estate, which it leases space to the operating business ABC. ABC pays rent to XYZ. XYZ distributes the rent to John Smith. John Smith also keeps any profits from ABC, the operating business.
The advantage to this method is that you can reduce your self-employment taxes in the operating business…as your income from the LLC that only collects rental income is not subject self-employment tax (there are exceptions to this, so get good tax software that explains the differences).
Furthermore, just like your company wouldn’t rent the booth to your neighbor on a handshake (you would use a written lease), the LLC should have a written rental agreement with each person renting a booth.
I know it might seem weird to “rent the booth from yourself”, but understand that the whole point of incorporating is that the company is not you. It is a separate “person” in the eyes of the law.
As far as taxes are concerned, as a single member LLC, you’d use the Schedule C on your 1040 form to report your income (unless you choose taxation as a corporation).
Can an LLC Pay Members an Hourly Wage that Varies on a Project-to-Project Basis?
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Can an LLC pay its members an hourly wage, which is tied directly to the number of service hours contributed to the enterprise, and perhaps even to a percentage of the actual money brought in on a given money earning project? Can these hourly payments be considered “guaranteed payments,” in the same way that a flat salary paid to members would be?
Here’s the situation: my friends are starting an LLC to provide web design, programming, and multimedia services to business clients. One member is a designer, one is a multimedia specialist, the third a programmer. They anticipate that the amount of money they will bring in, and how much of that money is due to the contributions of any one of the three contributing members, will vary widely depending on the project. Some varying factors would include:
(1) The hourly rate charged to clients for design, multimedia, and programming components will depend on the complexity of the project. A different hourly rate would apply to each component. So for instance; a job may demand complex programming but easy multimedia, and so the programming rate would be set much higher than the multimedia rate.
(2) Also, there could be projects that demand, for example, many more hours of labor from the designer than of the multimedia specialist or programmer, and vice versa.
Basically, they are struggling with the issue of how to set up a compensation system that guarantees each member a fair return for their contributions — which may, depending on the jobs they get, end up being grossly disproportionate to other members’ contributions.
– Eliana, North Carolina
You have a complicated setup here, but it is possible.
Guaranteed payments are the way in which LLC members are compensated for their labor contributed to the LLC.
I have seen LLC operating agreements where members agree on a set guaranteed payment for each member, with bonuses determined at the end of the year based on productivity of each member. This is common among professional practices (medical offices, law firms, etc.)
In a law firm, for example, each member/partner would take a year-end bonus based on some formula related to billable hours. In a medical practice, it could be based on revenue generated from patient billings minus the member’s proportionate share of expenses.
I would think a similar model could apply to web development.
While nearly any conceivable compensation arrangement can be written into your operating agreement, the important thing is that what is written is what each person had in mind.
Secondly, you’re going to want quality accounting software that lets all the members see exactly what their efforts earned and what expenses were associated with their earnings.
For example, you could have a business where one member brings in 50% of revenue, but uses 80% of expenses. He might claim 50% of profits, but the other members might object, pointing out that he generated more expenses than revenue, and therefore should be entitled to a smaller share.
You need to decide:
1. How revenue is counted.
2. How expense are allocated between the partners.
3. How to value “intangible” value added to the company.
4. When this performance based compensation is paid (at the end of each month, annual bonuses, etc.)
Unemployment Benefits for LLC Members
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If you are an LLC and pay into unemployment benefits, can you lay yourself off and collect employment benefits?
– Brandy, Oregon
If an LLC pays an employee, and thereby pays unemployment insurance, then a laid-off employee can collect unemployment benefits (provided all the other requirements are met).
Your question seems to be, can a member of an LLC pay him/her self a W-2 wage and then lay herself off for unemployment benefits? No. The unemployment statutes prohibit the owner of the business from laying him/her self off and collecting unemployment.
If the LLC elected to be taxed as a corporation, and you paid yourself a wage for a time, and then stopped paying yourself, your eligibility for unemployment depends on your state. Some states, for example, prevent corporate officers who own more than X% of the company stock from claiming unemployment (in Washington, for example, it’s 10%).
There is a pilot program operating in a few states that might permit the self-employed to collect a form of unemployment compensation:
Here’s how the program is described:
“Self-Employment Assistance offers dislocated workers the opportunity for early re-employment. The program is designed to encourage and enable unemployed workers to create their own jobs by starting their own small businesses. Under these programs, States can pay a self-employed allowance, instead of regular unemployment insurance benefits, to help unemployed workers while they are establishing businesses and becoming self-employed. Participants receive weekly allowances while they are getting their businesses off the ground.
This is a voluntary program for States and, to date, Delaware, Maine, Maryland, New Jersey, New York, Oregon and Pennsylvania have Self-Employment Assistance programs. The State Workforce Agency web sites for these states can be accessed at: http://www.servicelocator.org/OWSLinks.asp.”
How An LLC Manages Overseas Software Developers
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This is Mehul again. I am an owner of a Single Member LLC, which is currently operation as consulting firm.
I have my friend working from oversease for my LLC.
I asked you: ” How to compensate him/her for his/her work?”
You responded: ” Have the vendor generate invoice and pay vendor from business checking”
I have some questions on your answer and some other as below:
1) How can I Pay? Do I must need to send Physical Check to him/her? Or I can Pay via some third party services (for example xoom.com/western uinon/etc.) as his/her bank account will be in another country?
2) can I directly pay them to their personal checking account from business checking account or i must need to pay to some corporation or LLC in oversease and then they need to get paid from there?
3) currently, there are one person is working for my LLC from oversease, does it make any difference that ” How many people are working from oversease? ” or LLC just requires an Invoice to pay them ( Doesnt matter how many of they are working there)?
Your response is highly appreciate.
Thanks again in advance for all your help.
These are in-depth questions for a general interest website. You’ll need professional advice, but here is some general directions to look in.Let’s start with what NOT to do.
Option 2 is out. Don’t pay them from a personal account.
Instead, have the vendor generate an invoice billing the LLC for the work performed.
When the LLC receives the invoice, it will pay the vendor from the LLC’s business checking account to the vendor’s account.
The invoice from the vendor along with the LLC’s bank records showing the payment will be the documents you need to keep for tax and accounting purposes.
Assuming the LLC is a US business, its accounting should be kept in US dollars. While the vendor is paid in Indian currency, that amount will equal a certain amount of US dollars. The US dollar amount is the amount the LLC will report to the IRS as an expense.
1. It does not matter where or how the vendor is paid so long as the method (check, wire, credit card, etc.) is acceptable to both parties.
2. You should pay whatever entity (personal or individual) invoices your LLC for the work.
3. You simply need an invoice from the overseas independent contractors showing the work performed and the amount charged and the date of services and billings.
How Do I Pay An Employee If I Have An LLC?
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hi im thinking of going llc i have a small concrete finishing business and i want to protect my assets im thinking of like a partnership type thing with my wife but how do i pay employees or other people that help me without going through the hassles of payroll and other tax issues.
If you have an employee, then you must go “through the hassles of payroll”. This is regardless of whether you are a sole proprietor, LLC, corporation, partnership or other.
There are two solutions to this.
The first is to use a payroll service to handle these hassles. Quickbooks has a payroll service that is affordably priced. For a reasonable price, Quickbooks payroll service will handle all the taxes, withholdings, and so one that must be done.
The second solution is to treat your workers as independent contractors. In that situation, you would withhold nothing from their paychecks, and instead issue a 1099 at the end of the year.
However, you cannot treat just anyone as an independent contractor. The IRS has certain rules for when you can treat a worker as a statutory employee vs. independent contractor:
Be careful about misclassification of your workers:
Consequences of Treating an Employee as an Independent Contractor
- If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). See Internal Revenue Code section 3509 for more information.
If you really want to go deep into the topic of employee classification, here is the document the IRS gives its agents to train them on whether to classify your worker as an employee or IC:
You can file an SS-8 form with the IRS and they will determine an employee’s classification for you:
What Happens If I Don’t Want To Draw Any Kind Of Money Out Of The LLC?
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With a single member LLC the questions here are concerning most of the times how to “pay yourself”/how to get money from the LLC bank account. What happens if I don’t want to draw any kind of money out of the business ?
– Hugo, South Carolina
Remember, though, you still have to pay taxes on the LLC’s earnings, even if you don’t withdraw the money.
Because you pay your share of the LLC’s taxes out of your own pocket, the IRS doesn’t care if you leave money in the LLC.
All the above assumes that your LLC is taxed as a sole proprietor or partnership, and you did not elect to be taxed as a corporation.
How Do I As Sole Member Of My LLC With The S-Corp Election Pay Myself?
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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.
Multi Member LLC And Self Employment Tax
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I am an employee of a company and pay my appropriate taxes through my paycheck. I also own 50% of an LLC of which I trade securities through. Do I have to pay SE taxes through the LLC even though I already pay the maximum Social Security and Medicare?
Check with your accountant, but I believe the answer is no. When you fill out your Form SE for your LLC, there is a line where you list FICA taxes paid from other sources. When you list the FICA taxes withheld from your day job (lines 8a-8d on Schedule SE to your 1040), those will be subtracted out and you’ll owe no additional FICA taxes on your LLC’s income.
Remember that Medicare taxes (2.9%) don’t have the same wage cap (currently $97,000) as Social Security, so even if you cap out on Social Security taxes at your job, you’ll owe Medicare taxes on your income above $97,000. However, you won’t have to pay Medicare twice on the first $97,000 of your income, as lines 8a-8d on Schedule SE tax form take the withholdings from your job into account.
Single Member LLC Advice
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I will be the only one member in my LLC.
Means only owner and only employee.
I have one full time job as well. My LLC would be IT staffing and consulting company, so I don’t need any employee and even I don’t have to work daily.
I am in Texas and wanna form llc in texas profit will be 50k
1.Do i need to take salary every week ?
2.how about tax if i have to take salary and profit is 50k
3. How many different kind of taxes i have to pay, where and when ?
4. what if my LLC dont do any business in fiscal year
5.How hard to close LLC
Here are your questions, answered in order:
1. As a single member LLC owner and sole employee, you do not need to take a salary every week. In fact, you don’t take a “salary” at all–you simply take profits from the LLC as you earn them. This means you could pay yourself every day, or only once per year.
2. If your LLC earns a $50,000 profit, then what will happen is this $50,000 profit is recorded on your personal federal income tax form 1040, on Schedule C (I’m assuming here that you have chosen to have your LLC taxed as a disregarded entity). In addition to federal income tax, you will also have to pay self-employment tax. You calculate self-employment tax using Form SE on your 1040. Self-employment tax is the self-employed business owner’s equivalent to an employee’s Social Security and Medicare withholding taxes. Instead of withholding each pay period, as the owner of a single member LLC, you pay your self-employment tax at the end of the year with your federal income taxes.
Because you live in Texas, I’m not going to discuss state income taxes, as Texas does not levy income taxes.
3. As I said above, a single member LLC’s owner will pay federal income taxes, as well as self-employment taxes. In addition, you will have to make quarterly estimated income tax payments.
Some people think that making quarterly estimated tax payments is something employees do not have to pay. That is incorrect. As an employee, your employer withholds federal and state (except for Texas, of course) income taxes from each of your paychecks and sends the money to the IRS each quarter. In other words, your employer is an unpaid tax collector for the IRS.
As the owner of a single member LLC, you don’t have an employer to withhold your income tax payments, so you have to do it yourself.
The form for calculating your quarterly estimated taxes is Form 1040-ES (for EStimated). If you make a mistake and underpay your estimated taxes, you will be liable for interest plus a penalty of 1% per month.
TO avoid penalties for underpaying quarterly taxes, you must pay the lesser of:
A. 100% of last year’s taxes (divided equally among the four quarters); or
B. 90% of what you end up owing at the close of the current tax year.
4. If your LLC doesn’t do any business during the year, then it will not have any income or expenses to report. You simply fill out your Schedule C with zeros. It will be a very easy form to complete!
5. Closing an LLC in Texas is not difficult. The formal name for closing an LLC is called “dissolution”. In Texas, you file a Form 605 Articles of Dissolution. The filing fee as of 2008 is $40.
Other states will have similar forms (though with different names, form numbers, and filing fees).
Taxes For A Single Member LLC
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I own a tile business and is registered as single llc.
I’m not sure if the way I file my taxes is the correct or the best way. I pay myself every month base on hourly rate. I sent my taxes every three month base on those checks. At the end of the year I do my taxes using turbotax and basically I put my gross income, my expenses and my w-2. Is this the way to do it?
As the owner of an LLC taxed as a partnership, you are not a W-2 employee.
As the owner of the LLC, you are taxed on your share (if you are the sole owner, then 100%) of the LLC’s profit.
So, you need to first enter your LLC’s revenues, subtract expenses, and determine your profit.
This is all done on your Schedule C if you are a disregarded entity single member LLC, or on a separate Form 1065 if you are filing as a partnership.
Schedule C is part of your personal 1040, and the instructions for completing it are all there.
Turbo-Tax Home and Business (not Deluxe or Premier) is the one you want to use for your single member LLC.
As a single member LLC, you are not taxed on how much you withdraw from the LLC in “pay”, but on how much profit the LLC reports based on its revenues and expenses.
It is possible, for example, if your LLC has depreciable assets (such as real estate), that you could be cash-flow positive (putting cash into your pockets each month) and yet still have zero or even negative tax liability because of depreciation expenses.
Paying A Spouse Who Works For Your LLC
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In a single member llc can the llc pay wages to the member spouse? and if so what taxes are they subject to?
Your LLC can pay W-2 wages to any non-member that does work for it.
This includes your spouse and children.
As an employer, the LLC will be responsible for the whole gamut of taxes required of any employers. That means the employer share of Social Security and Medicare taxes, withholding of state and federal income taxes, and so on. I strongly recommend you use a payroll service from a company such as Quickbooks Payroll to handle this for you if you go this route.
The other alternative, if the spouse qualifies, is to pay the spouse as an independent contractor. In that case, the spouse would receive a 1099 at the end of the year and would pay the same taxes any 1099 person must–state, federal, and self-employment.
Paying Members Of An LLC For Services Performed
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Is it possible for a Member of an LLC to become an employee of the Company and receive a regular salary?
In a related question, I have an LLC that received a grant, and part of the grant funds salaries and benefits. If the payee through the grant is a Member of the LLC, are these payments considered salaries, taxable to the LLC?
Yes, you can.
When an LLC pays an active member a salary for services performed, it’s called a “guaranteed payment”.
However, the IRS places limits on how much an LLC can pay a member as a salary and how much is considered return of profits.
The IRS requirement is that the amount of teh salary for active LLC members must be reasonable in light of the services actually performed. In other words, if you pay a member $250,000 a year to sweep the floors, that won’t fly.
But, if you were to pay the prevailing local wage/salary for the job function performed, then there is no reason for the IRS succeed in challenging you.
See IRS Publication 535, Chapter 2 for more info.
Remember that the LLC is permitted to deduct the salary paid to members from its revenue to determine the amount of its profits.
Do I Need A W-2 As A Single-Member LLC With No Employees?
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Do I need a W-2 as a Single-member LLC with no employees? how do I pay myself and file my taxes?
You pay yourself by writing a check from the LLC to yourself. Profit distribution.
You file your taxes by reporting your LLC’s revenues and expenses on Schedule C of your 1040 tax return.
Because the LLC is a pass-through taxed entity, you don’t have to withhold taxes on each distribution from the LLC to its member.
Do not setup a W-2 for yourself as sole member of the SMLLC. It’s incorrect, confusing, and costly.
Should I Pay Wages If The LLC Isn’t Profitable?
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If I have a single member llc and i am the owner of the entity and the entity is not profitable. Should i still pay wages and issue a W2 to my self to protect against piercing. Can i just have a due to account on the books for accrued compensation to show that i will eventually get paid by the entity.
Before I can answer your question, I need to ask you a few:
If the entity is not profitable, how are you funding your paychecks?
Are you borrowing money from a bank or other lender?
Are you lending your own money to the llc and taking back a note?
Are you accruing expenses to outside vendors but not paying them, and instead paying yourself?
If you pay yourself “W2” wages (as opposed to taking a draw from your llc’s profits), remember that the llc must withhold payroll taxes, pay its share of payroll taxes, and make quarterly deposits of the same.
Good follow up questions, but you did not provide answers….
What is the implication if you loan personal start-up funds to your LLC and then it is not profitable? I would assume your “pay” is just a loan repayment. Should you charge your LLC interest, at a reasonable rate, so you will actually make some money from your LLC?
I would assume at some point the LLC makes money, but what is the implication if you need an additional loan to keep the LLC running? Can you keep loaning personal money to the LLC while simultaneously withdrawing loan payments (with interest) back to yourself?
Extending a loan is not a taxable event for either party.
Repayment of loans are not taxable either (for either party).
So your LLC can keep taking losses while making payments on old loans, and you can extend additional loans as well.
Be sure to create a paper trail in the form of promissory notes for the loans, and identify the payments as loan repayments (make up a payment schedule as well). Charge a reasonable rate of interest.
If the LLC is losing money, a tax deduction from the loss will flow through to the owners. This is regardless of whether the LLC has money in the bank due to additional loans.
Payroll Tax Responsibilities Of An LLC
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Can a single member LLC elect to be treated as a Sub S by electing under Form 2553 and pay himself/herself a “reasonable compensation” salary and receive the balance as K-1 profit. Or is all of the income from a single member LLC, electing Sub S status subject to FICA/MED .Is this where I’ll see your response? https://www.llc-made-easy.com/single-member-llc.html
If you select sub-S classification, then your “reasonable” compensation will be subject to FICA/MED, also known as self-employment taxes.
The remainder of the LLC’s profits can be distributed as dividends, which are still subject to income tax, but not self-employment tax.
The problem with electing sub-S classification is that there are more rules for sub-S than for an LLC taxed as a partnership or sole proprietor.
For example, every owner of an S corporation must be a natural person (not another LLC, corporation or partnership). If you add partners to your SMLLC, and you wish to allocate profits unevenly between yourselves, then you will lose your S-corp status.
Payroll Taxes For PLLC vs PC
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I formed a pc and now realize i have to pay myself via payroll and deduct taxes and send to irs etc…if I convert to a pllc can I take draws as I please and just pay taxes at the end of the year like it did b4 ? w/out dealing w eftps and sending taxes ….
Just to clarify for other readers:
“pc” means Professional Corporation. A Professional Corporation is essentially a corporation whose owners are all members of a particular profession, usually licensed by the state (such as lawyers, accountants, doctors, etc.), and where the purpose of the corporation is to provide such professional services.
A “PLLC” is similar in that it is an LLC whose members are licensed professionals and the purpose of the PLLC is to provide such professional services.
Each state has its own list of what occupations are considered “professions”.
As an LLC owner, you can take draws instead of a salary.
Like all taxpayers, LLC (or PLLC) members must pay quarterly estimated taxes, which can be calculated using Form 1040 ES.
Your self-employment taxes (which is the self-employed business owner’s version of the Social Security and Medicare taxes taken out of an employee’s paycheck) are calculated using Form 1040 SE.
Depending on your income level and amount of taxes owed the previous year, you might be required to pay estimated quarterly taxes.
How Do You Remove An LLC Member?
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My question is this, me and my wife are 50/50 partnership of our llc we do file a 1065 and k-1.
My wife has a full time job with another company and I run our business. Due to the economy if her company closes at the end of 2009 we want her to be able to collect unemployment.
So my understanding is that as long as she is a business owner she can not collect. How would I dissolve her interest and what steps are needed and time to dissolve.
– Mike, Nevada
Are you certain she cannot collect unemployment simply because she owns a membership interest in the LLC?
I understand that if she were claiming unemployment due to losing her job at your own business, she might not collect unemployment. But if she is a W-2 employee for a different company, merely owning shares/a membership interest shouldn’t disqualify her.
I mean, if you own 1 share of Microsoft, you are technically a “business owner”–that surely does not preclude you from collecting unemployment.
Be that as it may, assuming that she really must exit the LLC, here’s what you need to do:
- Amend the operating agreement to remove her as a member.
- Amend the articles of organization. (some states require filing of amended articles, some do not).
- Draft and sign a resolution authorizing her to sell/transfer her membership interest in the LLC to you.
See a licensed attorney to draft up those documents.
Legalzoom can prepare both the above types of documents (amendment of articles of organization and amendment to operating agreement).
Salary, Banking And Expenses – Self-Employed Vs LLC
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I am a self employed consultant but currently do all my work for one company and the pay is deposited directly to my personal checking account.
When I change to a single member LLC would the process be to open an account with the llc name, have the company make out the check to the llc name, deposit it to the llc account and then transfer my “salary” (basically all of the pay) into my personal account?
What document should my “salary” and these banking withdraw rights be stated on to maintain the integrity of the llc benefits?
Do I pay estimated tax or perhaps a life insurance premium out of the llc account or my personal account if married filing jointly?
– Janet, Maryland
You essentially have the process down:
2. Open a business checking account in your LLC’s name.
3. Have checks from your clients made out to your LLC.
4. Deposit those checks into your LLC bank account.
In addition to these steps, you also want to pay all your business-related expenses from your LLC checking account.
That means everything from web hosting to postage, to parking, to rent for an office space.
Assuming that your LLC makes money after all expenses, you can distribute those profits to yourself at any time.
The process for distributing profits from your LLC to yourself personally is simple — write a check from the LLC’s bank account to yourself personally.
This is not technically a “salary”, in the sense that the LLC must withhold taxes.
Remember than an LLC is a pass-through tax entity. Any profits or losses from the LLC flow through directly to your personal income tax forms through the Schedule C (assuming a single member LLC).
Write “profit distribution” or something similar in your LLC’s check to yourself.
In terms of risks to your corporate veil, this would only be an issue if your LLC was operating at a loss, and yet you kept writing checks to yourself, thus defrauding your LLC’s creditors.
But, if your LLC is turning a profit, you clearly have the right to withdraw that profit personally.
The key is to keep good accounts for your LLC.
Because your LLC doesn’t withhold taxes for you like an employer would, you must pay estimated taxes on your own.
An explanation of quarterly estimated taxes, and the forms, are found at www.irs.gov , search for “Form 1040 ES”.
First, as for benefits, an LLC, unlike a corporation, cannot pay benefits such as life or health insurance premiums. The LLC can of course pay all business-related expenses, but life insurance, for example, is a personal benefit that should not be paid from the LLC account, it is not a deductible LLC expense. (Imagine this taken to the extreme: you could decide your LLC provides you housing, a car, meals, etc.)
On the subject of operating and payment documentation, I understand that none is required, especially for a single-member LLC. However, an Operating Agreement can’t hurt, and this is were profit distributions could be spelled out, if desired. And, certainly keep a record of the “profit distribution” payments.
You cannot deduct personal expenses from your LLC’s revenues to reduce its profits (or increase losses).
In other words, its not which entity that writes the check that determines deductibility, but rather the nature of the expense.
Business expenses are deductible, personal expenses are not.
When it comes to health insurance premiums,however, you CAN take a deduction for premiums paid if your were self-employed and show a profit on your Schedule C.
See line 29 of your Form 1040.
From the IRS:
“You may be able to deduct the amount you paid for health insurance for yourself, your spouse, and your dependents if any of the following applies.
1. You were self-employed and had a net profit for the year.
2. You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.
3. You received wages in 2005 from an S corporation in which you were a more-than-2% shareholder. Health insurance benefits paid for you may be shown in Form W-2, box 14.”
Self Employment Tax and S Corp Status
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I have a few questions.
It is to my understanding that a LLC owner must pay self employment tax. If I file a form with the IRS to treat me as a S-corp, will this avoid the SE tax?
In order to treat my LLC as a S-Corp, do I need to file form 2553? or must I file both Form 8832 and 2553?
Also if I am elected as S-corp (but still organized under a LLC) can I still have disproportional distributions of income among the member-owners?
As an S-Corp, it is true that you do not have to pay self employment tax on dividends paid to the owners.
However, the IRS knows about this loophole and requires S-Corporation owners to pay themselves a “reasonable” salary–which IS subject to self-employment tax.
So you can’t entirely avoid self-employment tax with an S-corp, you could possibly reduce it if your LLC’s profits exceed what is a “reasonable” salary (as determined by the IRS) and you can therefore take some of your profits as a non-self-employment tax dividend.
In addition, Obamacare has enacted a 3.8% Medicare tax on dividends, so even S corps that distribute income as dividends do not avoid all self employer taxes.
File the 2553 timely and you do not have to file an 8832 (see the bottom left to top middle of page 4 of Form 8832).
You CANNOT make unequal distributions to S-corporation shareholders.
One of the qualifications for an S-corporation is that it has only one class of stock. If you make unequal (meaning, disproportionate–e.g. if someone owns 10% of the stock they get something other than 10% of the profits) distributions, you have created multiple classes of stock and now you are a double-taxed corporation.
To keep your S-corporation status, you must distribute the same number of dollars per share to every shareholder, otherwise you lose it.
This is part of the reason why many multi-member LLCs choose to be taxed as partnerships, rather than S-corporations, despite the ability to partially shelter some S-corporation profit (but not all) from self-employment tax.
Single Member LLC owned by an S corp
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We were recently told by our accountants that we could contribute our single member llc to a newly formed s corp. They told us that my husband would still remain the single member. That does not make sense to me b/c he contributed the LLC to the S corp for 100% ownership in the s corp.
Wouldn’t the new member be the S corp?
And can we pay my husband wages through the LLC? (now that it’s owned by the s corp, can issue his wages through the LLC instead of the s corp)
I believe that the llc will will flow through all of it’s income/expenses onto the s corp return. correct?
It’s a little unclear what your accountant is suggesting.
Is the SMLLC to become a shareholder in the s-corporation?
Or did you mean to say “convert” your SMLLC to an s-corporation taxation?
The general rule is that only natural persons can be shareholders of s-corps (no LLCs or corporations).
Perhaps there is a new letter ruling that makes an exception for SMLLCs, and this is what the accountant is referring to.
Does the SMLLC have significant assets which would cause tax issues by changing form to another type of entity?