Can You Pay Yourself Through an LLC?
Yes, but the way you pay yourself will vary based on the type of LLC you have. So before we go any farther, let’s take a second to review the different LLC models.
- Single-Member LLC: one owner responsible for the company
- Multi-Member LLC: multiple owners share responsibility for the company
For this article, we’re going to focus on single-member LLCs and toss in a bit of information about multi-member LLCs.
How Do I Pay Myself as a Single-Member LLC Owner?
You have two options for paying yourself in a single-member LLC:
- Add yourself to the payroll
- Use owner draws
Can a Single-Member LLC Owner Be on Payroll?
Technically yes, but this does get dicey. In order to have a salary, you have to prove that you are actively working within the business. And you can’t go crazy on your paycheck; you have to stay within the industry norms. However, you can issue yourself a bonus as long as it’s reasonable compared to your salary.
You have to fill out a W-4 to identify the amount withheld from your paychecks to put yourself on the payroll. At that point, you’ll be a W-2 employee and will have to pay income tax on your wages.
Putting yourself on the payroll also requires that your LLC is taxed as a corporation, so you’d have to fill out a separate tax return for you and your business.
Should I Put Myself on Payroll?
It’s entirely up to you. If you don’t want to assume an active role in the company, it’s a quick no.
Being on payroll can be beneficial if you want to have a steady income. Additionally, the IRS considers employee wages as operating expenses, meaning that the total paid in wages is deducted from your profits.
Owner Draws for Single-Member LLCs
Because you take your income from your company’s profits, you can perform an “owner’s draw.” An owner’s draw occurs when you, the owner of a business, take money from the business account and deposit it into your personal account. But you’ll need to document the transfer of money officially.
Whether you write yourself a check or execute a direct transfer, your withdrawal needs to be on the books. Many accountants recommend using double-entry bookkeeping to note when money comes out of your business account and goes into your personal account.
Come tax season, you’ll need these records to demonstrate your profit’s distribution. Most LLCs are taxed as pass-through entities, and the net income of your business will be listed on your personal tax return. And since you’re taxed on the net income, you won’t be doubly taxed on the money you draw throughout the year.
What About Multi-Member LLCs?
Things get slightly more complicated when you share ownership, but the bulk of it remains the same. Like single-member LLCs, the route you take will be defined by whether your LLC operates as a partnership or corporation.
Paying Yourself with a Partnership LLC
Because a partnership is a pass-through entity, the members can make owner draws. Instead of the partnership itself being taxed, each member pays a portion of the total income tax of the business’ earnings as designated in the partnership agreement.
At the end of the year, each partner will complete a Schedule K-1 to report their share of the company’s income and prepare their personal income tax return.
But it’s essential to note that you will pay income tax on your entire share even if you don’t draw the total share (i.e., if you have a 25% stake in the company and only withdraw 12.5% of it, then you still have to pay the tax on 25%). And you will have to pay self-employment taxes on the money you withdraw.
Paying Yourself from a Corporate LLC
If your LLC is taxed as an S or C corporation, then all of the shareholders must be hired on payroll and paid a salary. On top of that salary, members can take an extra percentage of the business’s income as designated in the articles of incorporation.
As an employee, you’ll have income tax and payroll tax withheld from your payments. If you’re using the C corp model, you’ll be double-taxed, as the IRS charges your company income tax, and the employees have to pay personal income tax.
However, your dividends are exempt from payroll tax, so the more income you receive from dividends, the less tax you’ll have to pay. Just remember to stay in the realm of “reasonable compensation.”
What Is the Best Way to Pay Yourself as a Business Owner?
It depends on what your priorities are.
If you want a steady salary and you’d prefer to complete separate tax returns for you and your business, putting yourself on payroll is the way to go.
If you want to complete only one tax return and make withdrawals from your profits as you go, then you should opt for owner draws.
Does a Single-Member LLC Need an EIN?
If your LLC is taxed like a corporation and you have to file a separate tax return for your business, then you will need an EIN.
If you prefer to have your LLC treated as a partnership and plan to submit only one tax return, then you don’t need an EIN.
Can I 1099 Myself from my LLC?
Yes, you can hire yourself as an independent contractor. It’s a lot like the process of hiring yourself on the regular payroll, except in this instance, you’d fill out a W-9 for yourself, and your business would submit a 1099-MISC at the end of the year.
But if you think that independent contracting is a way to circumvent taxes, just remember that you’ll still be responsible for paying self-employment tax on the total amount you earn.