When your business is a limited liability company (LLC), revenue goes to the LLC, not you. But you’ll need to get paid, of course, to make a living.
There are many ways to pay yourself from an LLC, depending on how your LLC is taxed. This handy guide explains how to get it done.
How LLCs Are Taxed
LLCs are pass-through entities, which means income passes through the company to the owners or members. If the LLC has only one member, it’s taxed as a sole proprietorship.
If the LLC has more than one member, it’s taxed as a partnership. Either way, income is reported on members’ tax returns.
But LLCs are unique because they can elect to be taxed as a corporation if the members decide it makes financial sense. This is done by filing an election form with the IRS. You can choose to be taxed as a C-Corp or an S-Corp.
C-Corp status means income is taxed at the current rate for corporations (21% as of late 2022), which is lower than the usual individual taxpayer rate. But keep in mind that C-Corp shareholders – who are members in the case of an LLC – must also pay taxes on their distributions. This is called double taxation.
However, members are subject to self-employment tax in an LLC taxed by default as a sole proprietorship or partnership. Once such LLC switches to being taxed as a corporation, self-employment taxes no longer apply.
Similarly, self-employment taxes do not apply to members with S-Corp status, which is the main advantage of electing S-Corp status. With S-Corp status, the LLC remains a pass-through entity not subject to corporate taxes.
With S-Corp status, members are generally paid as company employees, which means more accounting and payroll expenses. Therefore, S-Corp status is only beneficial when the self-employment tax savings are more significant than those additional expenses.
How LLC Members are Paid
How you get paid as an LLC member depends on your chosen tax status.
If the LLC is taxed as a Sole Proprietorship or Partnership
If you’re the only member of an LLC and choose the default tax status, you can receive all the profits. If the company makes $50,000, for instance, you can receive $50,000.
You can receive distributions all at once or take them at intervals. Then, you write a check from the business bank account to pay your distributions. You’ll record the withdrawal for accounting purposes as an owner’s draw.
You will report all profits on Schedule C of your tax return, not just your draws. You’ll also be required to pay self-employment taxes on the profit.
In a multi-member LLC taxed as a partnership, members of the LLC can also take distributions from the profits. Distribution amounts are usually based on each member’s ownership percentage. For example, if two members own 50% and the business makes $50,000, each member draws $25,000.
A multi-member LLC taxed as a partnership must file form 1065 with the IRS, which is the Return of Partnership Income. Attached will be K-1 forms for each member showing their share of the business profits. Form 1065 is for reporting purposes only, as the LLC does not pay taxes.
Each member pays taxes on their share of profit based on Schedule C of their tax return and self-employment taxes on the profits.
If the LLC Is Taxed as an S-Corp or a C-Corp
If your LLC is taxed as a corporation, you cannot be paid in distributions from your LLC. Instead, you must be paid as an employee of the LLC.
You must have an active role in the LLC to be an employee, so if you’re not involved in the business’s operations, you cannot receive a salary or be an employee. In addition, if your LLC has more than one member and is active in the business, all members must receive a salary.
To become an employee, you’ll file a W-4 form. Then you can pay yourself a salary and receive a W-2 for tax purposes. Income tax and payroll taxes must be withheld from your salary checks.
The wages you’re paid will be an expense of the LLC, deducted from profits for accounting purposes. Remember that IRS rules state that salaries must be within industry norms for your role.
If there are profits left after your salary, you can take part of the LLC profits as a shareholder distribution if you have S-Corp status or a dividend if you have C-Corp status.
How you get paid as an LLC owner depends on the tax status you’ve chosen for your LLC. But you may want to speak with your tax advisor to learn more and decide which method is best for your business. The choice can make a big difference in the financial health of your business.