How To Pay Yourself From An LLC Or An S Corp
As a business owner, deciding how to pay yourself can be a tricky task. How you pay yourself will dictate how you are taxed on your business and personal income. Paying yourself the right way from your LLC or S Corp can save you a massive headache and thousands in taxes. Your LLC can also be taxed as an S Corp.
The question is, which is right for you and your situation?
The first question you need to figure out is do you have a single member or multi-member LLC? Single-member LLCs contain only one member while multi-member LLCs have multiple partners listed on the LLC.
The second question you need to ask yourself is should you be taxed as an S Corp or as a regular LLC? The answer is based on the revenue that your business made in that calendar year.
If your business generates over $50,000 a year in profit and your CPA recommends it, you should tax yourself as an S Corp.
The reason behind this is because there are significant tax benefits in paying yourself as an S Corp. If your business is making less than $50,000 a year in profit, an LLC will still provide significant tax benefits.
How to pay yourself from a single-member LLC.
As the owner of a single-member LLC, you don’t get paid a salary or wages. Instead, you pay yourself by taking money out of the LLC’s profits as needed.
That’s called an owner’s draw. Making an owner’s draw is pretty simple. It only has two steps:
- Write yourself a check from your business account for the amount you’re taking out of your business. You’ll deposit this check in your personal bank account.
- Record the withdrawal on the books as an owner’s draw—a reduction in your owner’s equity account credit from your owner’s equity or capital account.
An LLC is a pass-through entity which means the owner is able to utilize the business’s profits and losses. If your business has not made any money yet, make sure to file your business taxes with your personal taxes in order to write off your losses against any other income that you have.
How to pay yourself from an S Corp
Are you really an S Corp? – to file your taxes as an S Corp you will need to file a form with the IRS to give your LLC the S Corp designation.
The first requirement is that you must process payroll for your employees or yourself. The second requirement is that you must pay yourself a reasonable wage.
It’s up to you to decide how much employee salary to pay yourself. Reasonable pay is the amount that similar enterprises would pay for the same, or similar, services. In other words, what do other workers in similar roles to yours get paid by their employers? But it’s also important to consider how the IRS would see things.
If you’re concerned about choosing the right amount of compensation, don’t worry.
Here’s a simple strategy that you can try, and it’s called the 60/40 rule:
- Pay 60% of your business income to yourself in the form of employee salary
- Pay yourself 40% of your business income in the form of distribution.
Note: This isn’t a rule sanctioned by the IRS. Rather, it’s a rule of thumb that’s used by many accountants.
When it comes to taxes and which designation you should use for your LLC or S Corp, it is always important to use a tax professional. Using a tax professional can help you avoid filing the wrong way, and could save you thousands in taxes every year.
If you have questions about how you should file your taxes and how you should pay yourself, schedule an appointment to speak with an expert today.