how best fo "pay self", employees, in single member LLC

by Bean
(Provo, UT)

Hi, thanks so much for your help and information.

My question concerns the best way to structure budgeting for paying employees and myself in a single member LLC in which I am the sole member.

My understanding is that, as a single member LLC, the pass-through feature allows me to pay taxes on the profit as part of my personal tax return so I don't need to file separately for the company.

Does it make sense to pay employees (as well as all other company expenses), then pay taxes once on what's left as income?

At that point the net income is essentially my income, and I could essentially take out what I wanted from it, right?

Or does it make more sense to pay myself as one of the employees?

Or none of the above?

Thanks so much for any advice you can provide!

Answer

Pay your employees using a payroll system...meaning, hire ADP, or some other service such as Quickbooks Payroll, to handle withholdings for your employees.

NEVER TRY TO DO PAYROLL ON YOUR OWN!

Unlike other business debts, as owner of your company, you are personally liable for unpaid payroll taxes and withholdings.

The IRS does not need to pierce the corporate veil in order to hold you liable--you simply are liable under federal law.

Same goes for state taxes.

As an employer you are an unpaid tax collector for the IRS, and if you don't do your job, you not only fired but fined.

I also think these payroll tax debts are not dischargeable in bankruptcy (and bankruptcy has become very unattractive for debtors since the credit card companies got their bill passed into law a couple years ago).

Therefore, don't fool around with payroll taxes--use a service like ADP or Quickbooks Payroll.

As the sole member of the LLC, you do not want to put yourself on the payroll.

Instead, you take distributions of the LLC's profits. Your LLC's profits are calculated as revenues - expenses (rent, utilities, advertising, employee payroll, etc.). You will report your LLC's profits on Schedule C of your 1040 as a single member LLC, or a Form 1065 + K-1 if you are taxed as a partnership instead of a disregarded entity.

You can take profit distributions according to any schedule that fits your company's cash flow. Be sure to distribute enough profits to yourself to pay your estimate quarterly taxes.

You can determine your estimated quarterly taxes using Form 1040-ES (think "EStimated").

If you are also holding a "day job" (with a W2 and withholdings) in addition to running your LLC, then you need to factor in the withholdings from your day job. Otherwise, you'll overpay and get a big refund when you file.