How to Pay Yourself in an LLC

By Phil M. Fowler

As an active owner-operator of an LLC, you have the option of paying yourself wages as an employee of the LLC or simply paying yourself profits as a member of the LLC. The LLC generally pays wages on a regular basis as the employee performs the work, while the LLC does not distribute profits to members until the end of the year. Members can, however, pull periodic draws from the LLC. A draw is basically an early withdrawal of anticipated year-end profits.

Employee Wages

Any LLC member who is actively involved in the business of the LLC is eligible for wage payments as an employee of the LLC. For instance, if you are the owner of an LLC that provides marketing services to your clients, and you are the person who actually manages client relationships and implements marketing strategies, you are an active member of the LLC and can set yourself up as an employee. On the other hand, if you are a member solely because you have invested some cash into the LLC, but you are not involved in any of the actual business of the LLC, then you are not an employee, and you cannot receive wage payments. A member of an LLC can also receive compensation as an independent contractor of the LLC, although there is typically little value in structuring member compensation this way.

Profits

LLC members always have the option to receive compensation in the form of year-end profit distributions. Each member has a percentage interest in, or a percentage of ownership of, the LLC, generally referred to as the member's capital account. Profits typically pass through the LLC to the various members based on their percentage interest. For example, if you who own 25 percent of the LLC, then you will probably receive 25 percent of year-end profits. Similarly, if you own 100 percent of the LLC, then you are entitled to 100 percent of the profits.

Ready to start your LLC? Start an LLC Online Now

Draws

LLC members who don't want to receive wage compensation as employees of the LLC may still want to receive periodic payments throughout the year, rather than waiting until the final distribution of profits at the end of the year. As an LLC member, each time you recieve a draw during the year, your capital account decreases by the amount of the draw. Then, at the end of the year, your capital account goes back up when profits are accounted to you. In very simple terms, a draw is an advance payment of expected year-end profits.

Forms

The LLC must file the correct tax forms and keep the correct accounting records throughout the year. Any member who will be paid as an employee of the LLC must file an IRS Form W-4 to calculate the amount of payroll tax withholding from each paycheck. The LLC then pays the member-employee as a W-2 employee of the LLC. If you are going to pay yourself as an independent contractor, then you need to file an IRS Form W-9 with the LLC, and then the LLC needs to file an IRS Form 1099-MISC at the end of the year. Finally, if you will receive draws during the year, the appropriate accounting procedures need to be in place to keep track of all the draws, to estimate year-end profits and to track your capital account. This can all be complicated and sometimes requires the assistance of an experienced accountant.

Taxes

When you pay yourself as an employee of the LLC, the LLC must withhold income and employment taxes from your pay and also pay the employer portion of employment taxes on your wages. Alternatively, if you pay yourself as an independent contractor, or solely in your capacity as a member of the LLC, then the LLC does not have to pay employment taxes nor does it have to withhold income or employment taxes from your wages. Instead, you will have to pay self-employment taxes, on your personal income tax return, for all of your payments from the LLC.

Ready to start your LLC? Start an LLC Online Now
Deducting a Salary for a Single-Owner LLC
 

References

Resources

Related articles

Can I Pay Myself As an Employee As the Owner of an LLC?

A limited liability company is a relatively new form of business organization that combines elements of a corporation and partnership. These entities are often relatively small businesses, which typically means that at least some of the owners work on the LLC’s behalf. If you own an LLC and work for it as well, you may qualify as an employee. This is an important distinction because it may influence whether you or the business have an additional tax burden.

What Can an LLC Deduct?

The only time a limited liability company is responsible for remitting federal income tax payments is if the members elect to treat it as a corporation for tax purposes. If the LLC members do not elect corporate tax treatment, each member is responsible for reporting a portion of the LLC's income and deductions. Regardless of how you classify the LLC for tax purposes, the business is eligible to deduct a wide range of business expenses.

Can I Form an LLC While Employed or Working at Another Job?

Many people hold down two jobs to make ends meet, or dream of owning their own business while working day-to-day in a company owned by someone else. With an abundance of energy, appropriate financial resources and ample support from family and friends, you can be an employee and entrepreneur at the same time, so long as your job contract terms do not preclude you from forming an LLC while you are still employed.

LLCs, Corporations, Patents, Attorney Help

Related articles

How to Reduce Taxes Using an LLC

If you receive a 1099 for nonemployee compensation, or operate a sole proprietorship or partnership, you are probably ...

How to Pay Partners in an LLC

How a member of an LLC is paid depends in part on how the company is taxed. A multiple-member LLC is taxed as a ...

Why Is a Sole Proprietor Not Entitled to a Tax Deduction for Salary Payments to Himself?

When choosing to operate your business as a sole proprietorship, no legal entity exists that separates your business ...

Classifying Payments to Yourself in a Sole Proprietorship

Running a business as a sole proprietorship rather than a formal legal entity, such as a corporation, can greatly ...

Browse by category
Ready to Begin? GET STARTED