Paying yourself as an employee


(Missouri)

All though you are the sole member of an LLC, could you still possibly pay yourself as an employee? For instance, when you get Quickbooks, sign up for the payroll service and then have taxes taken out of your pay each time and just pay yourself as you would your employees?

Answer

You don't want to run it that way--it's more complicated, costs more, and is not legally required.

In fact, unless you have elected to have your SMLCC (single member LLC) taxed as a corporation, I don't even think it's legal to W-2 yourself (e.g. put yourself on payroll).

Instead, as a single member, simply write yourself a check for the amount of the LLC's profit each month, quarter, year--however you want to arrange it.

Use Form 1040-ES and 1040-SE to, respectively, calculate your quarterly estimated taxes and estimated self-employment tax. Put that money aside so you can make your quarterly payments.

If you have a high-paying day job (making $100,000+), then you might only be liable for the Medicare portion of self-employment tax--about 2.7% as of 2008.

TurboTax Home and Business Online will help you calculate estimated taxes for your LLC. Be sure to choose "Home and Business", and not Deluxe or Premier, as "Home and Business" is designed for single-member LLCs.

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Paying yourself before positive net income

In my financial projections, I'm showing a negative net income prior to FY3. I've always understood that most startups are negative in the first year, zero around year two, and positive in year 3.

My problem is, how do I pay myself if I'm not turning a profit for 3 years?

Answer

Good question.

There is a difference between cash flow and income.

You can have losses in your company, but still have positive cash flow to permit you to pay yourself. The most common way to do this is to have loans or investor capital (selling stock).

However, many investors won't loan the company money for you to take a salary, though some will.

Otherwise, there is no way for you to pay yourself if your business is losing money. I would suggest going back through your projections and seeing if there are expenses you can cut (such as an employee whose work you can do yourself).

Your only other alternative is to save enough money to live on while your business is starting up.

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how do I take a paycheck

by richard
(Clinton, ct, usa)

I own a LLC with my sister, I need to know how to take a paycheck and what forms are need and/or records to be kept.

Answer

As owner of the LLC, you are entitled to take distributions of the LLC's profits.

In fact, it is a good idea to withdraw your LLC's profits, as you will be taxed on them irregardless of whether you leave the money in the LLC or take a distribution.

The process for taking a distribution of profits from your LLC is very simple: You write a check from the LLC to yourself.

That's all there is to it.

This is much different from taking a "paycheck", in the sense of withholding payroll taxes and so forth.

As the owner of the LLC, you will pay "payroll" taxes (though they are called self-employment taxes in the context of being an LLC owner). You will file Form 1040 SE when you file your personal taxes at the end of the year with the rest of the personal tax return.

Be sure also to look at IRS Form 1040 ES, which covers the estimated taxes you might be liable for each quarter.

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how do I pay myself

how do I pay myself in a LLC company?

Answer

As a member of the LLC, you pay yourself by taking distributions of your LLC's profits.

The process is simple: you write yourself a check from your LLC's bank account to your own.

You do not have to setup a payroll system if you have no employees other than yourself.

Note that you still might be liable for self-employment taxes as the owner/member of an LLC. See IRS Form 1040-SE for instructions on filing your self employment tax as an LLC owner.

Other Visitor's Questions

Question Is there a problem with paying myself by transferring money from LLC bank account to my personal account online?

Answer

It is no different, legally, from writing yourself a check from the LLC.


Question
How do I get paid as a managing member of an LLC?
--by Bruce (Port Charlotte, Florida, US)

Answer

You write a check to yourself from the LLC's bank account.

Payments received by members from the LLC can be any of the following:

1. Guaranteed payments
2. Share of profits
3. Repayment of interest/principal of loans made by member to LLC.
4. Return of a capital contribution to a member

QuestionReturn of Capital
by: Anonymous

Are there tax consequences for the return of initial investment capital? For instance, if you fund an LLC to buy an investment property with cash. After a short time period the LLC gets a loan on this property. When the loan proceeds are given to the LLC, can these proceeds be given back to the original contributor of capital with no tax consequences?

Response

There might be some extra complications with recourse vs. nonrecourse debt you would want to consult with an attorney about if you want to deduct passive losses.

However, in terms of taking a draw from the LLC, that should not create tax liability. Neither is borrowing money an event that triggers taxable income. A cash contribution to an LLC is not a taxable event.

While this sounds like a "free lunch" initially, the IRS gets its money back over time

As the LLC repays the loan, it will deduct the interest portion of its payments as a business expense, but not the principal.

Therefore, the LLC could potentially show a taxable "profit" even though it is cash flowing negative.

Example, suppose the LLC owns a commercial building that receives $120,000 in rent and pays $144,000 in mortgage payments for the year. Of those $144,000 in mortgage payments, $100,000 was interest and $44,000 was principal (assume no other operating expenses for simplicity sake).

Although the LLC had negative cashflow of $24,000, it showed a profit of $120,000 - $100,000 = $20,000.

This is referred to in the industry as "phantom income", because you are taxed on it but cannot spend it.

This makes sense, as it is the symmetrical opposite to the LLC's position when it took out the loan and had positive cash flow without showing a profit.

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pay before profit

Can I pay myself before computing profit, which lowers tax liability?

Answer

As an LLC taxed as a partnership (or a single member LLC), "paying" yourself does not reduce your tax liability.

Payments to yourself do not constitute a business expense deduction for your LLC.

Instead, your LLC calculated its profit based on revenues - permitted deductible expenses. You pay tax on that profit. The LLC does not pay taxes itself, the tax liability passes-through to you--hence, the name "pass-through entity". Partnerships are taxed similarly.

As the owner of the LLC, you can (and should) take distributions of your LLC's profits.

Now, in the situation of a corporation, it's true that if you are on the payroll, your wages are deductible for the corporation. However, you are personally liable for taxes on your wages. Plus, the corporation pays tax on its profit (minus your wages and other expenses). Then, if there is anything left over, and the corporation distributes dividends to you, then you are taxed on those dividends as well.

Currently, the tax rate on dividends is 15%. However, prior to the Bush tax cuts, the tax rate on dividends was 39.6% (maximum). If Obama is elected President, he has indicated that he'd like to reverse the Bush tax cuts, which would make the corporate double tax much more onerous (35% tax on corporate profits, then a 39.6% tax on dividend distributions to owners).

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Pay

How do I pay myself?

Answer

With money! :)

As the owner of an LLC, you pay yourself from the profits.

There is no special way to do this--you simply write a check from your business account to yourself.

You don't do any withholdings or payroll. Just a check.

Now, don't get too excited. You still have to pay your self-employment taxes and estimated income taxes. It's just that you don't have your employer acting as tax collector on your behalf.

The good news is that you get to time your receipt of profits and payments of taxes on your own schedule.

That's also the bad news...if you are not responsible about putting aside enough money for taxes.

My suggestion is to keep good track of your income and expenses during the year, and to invest in decent tax software for small business, like TurboTax Online.


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As an owner of an LLC should I put myself on payroll?

We have put ourselves on payroll as 25% owners of an LLC we are getting hit with big Federal bills on our payroll. Should we remove ourselves from the payroll? Is it required to be on the payroll as an owner of an LLC?

Answer

Unless your LLC is taxed as a corporation, you should NOT be on the payroll as a W-2 employee.

Instead, you should take profit draws or guaranteed payments from the LLC, and make quarterly estimated payments on your income tax and self-employment tax.

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2 partners in a LLC, how do we pay ourselves?

How do 2 partners in a LLC setup so that we can pay ourselves from the business? is it done any differently then a single member LLC?

Answer

Each member is paid out his or her share of profits (just write a check), based on what you have agreed to in your Operating Agreement.

Don't have an Operating Agreement?

In a multi-member LLC, you really do need one.

While most states do not require your to have an Operating Agreement (or if they do require one, you don't need to prove to the state that you have one), you ought to have one drawn up anyway.

The Operating Agreement is a contract between you and the other members of your LLC. It determines everything about how your LLC is run...from how profits are divided, to whether members can sell shares to outsiders without offering other members the right to purchase first, to what businesses the LLC can perform.

If you and your fellow partners (members) get into a dispute down the road, the first thing your attorney will want to see is a copy of your Operating Agreement.

Without that written document, it's going to be a battle of "he said, she said". As a litigator, I can tell you that these can be the most expensive cases to resolve.

Instead of being able to look at the document to work out the dispute, we have to rely on verbal testimony. Which means that everyone involved has to go through expensive and time-consuming depositions.

The good news is that you can get an Operating Agreement at a reasonable cost.

Legalzoom's LLC formation services include an Operating Agreement as part of their services.

If you already have formed your LLC, Legalzoom can prepare a customized Operating Agreement starting at $99 (as of November, 2008).

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