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How to Pay Yourself From Your Own LIC (2022 Guide)

After forming an LLC, managing your firm requires a bit more effort than when you were a sole proprietor. To further complicate matters, the IRS offers a variety of choices for paying yourself (and your taxes).

This post will explain how to pay yourself from an LLC, including your alternatives, how to choose the proper one, and how to organize payments to remain on top of your taxes.

Here are the four most common ways to collect payment from your LLC.

1. Reimburse Yourself as a W-2 Employee

Many LLC owners find that treating themselves as employees is the most advantageous approach to getting remuneration.

In this setup, you and other owners who actively work in the business are employees/owners and earn paychecks as an employee would.

As long as your firm generates sufficient consistent revenue to meet your salary or wages, this might be a method for securing a stable income for your family.

According to the Internal Revenue Service, you must compensate yourself “reasonably.” The IRS does not specify a minimum wage; rather, it must be a standard wage for someone performing your profession.

If you pay yourself in this manner, you have the option of being taxed as an S-corporation. The benefit is that you only pay FICA, Medicare, and Social Security taxes (often known as “self-employment tax”) on the salary or earnings you pay yourself, rather than on all firm revenues. On a portion of your income, you’ve saved around 15% in taxes.

2. Establish Profit Distributions


Any LLC member (also known as a shareholder) can be paid via profit distributions or owner’s draws. This refers to the distribution of company profits to shareholders.

The procedure can be more complicated if you are a member of a multimember LLC, but for a single-member LLC, it resembles how you would pay yourself as a freelancer. You deposit money into your own bank account upon receipt of funds.

The operating agreement of a multimember LLC specifies how and how frequently earnings will be distributed.

The disadvantage of selecting this as your primary payment method is that you will be required to pay self-employment taxes on all business income, not just a set salary. If your firm is your primary source of income, you might pay yourself a salary and take an owner’s draw from additional profits.

3. You Should Pay Yourself as a 1099 Independent Contractor

Theoretically, you can pay yourself as an independent contractor rather than an employee of the business; however, this is not usually advantageous for the majority of small businesses.

When you pay yourself as a contractor, you avoid withholding payroll taxes from your paycheck, and your personal account receives the full amount, just as it would for any other contractor.

Nevertheless, this is not a usual method for saving money. Instead of paying payroll taxes from your paycheck, you pay the same amount as self-employment tax when you file your quarterly taxes as a self-employed individual.

This method may also be complicated because you must file taxes as both the LLC’s owner and a contractor (as a sole proprietor or as the owner of a separate LLC).

It may make sense if you are a shareholder in an LLC for which you do not actively work and want to give occasional services, but it is not a usual strategy if you own and control your LLC.

4. Retain the Profits for the Business

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The last available alternative is to not pay yourself at all. You may do so if you wish to reinvest profits in the firm rather than keeping them for yourself, or if you wish to create a business savings account.

Even if you do not receive a salary or payout, you are still required to pay income taxes on any business profits.

Tax authorities treat LLCs as pass-through organizations by default, so profits are taxed as part of your own income. (The business pays no additional tax on them.)

If you’ve elected S-corporation tax treatment, this option should be used with caution. If the business is not generating a great deal of revenue, not paying oneself could pass the “fair compensation” criteria. However, leaving money in the firm to avoid self-employment taxes could cost you fees and back taxes in the future.

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