Salary , banking, and expenses - self-employed vs llc

by Janet
(Maryland)

I am a self employed consultant but currently do all my work for one company and the pay is deposited directly to my personal checking account.

When I change to a single member LLC would the process be to open an account with the llc name, have the company make out the check to the llc name, deposit it to the llc account and then transfer my "salary" (basically all of the pay) into my personal account?

What document should my "salary" and these banking withdraw rights be stated on to maintain the integrity of the llc benefits?

Do I pay estimated tax or perhaps a life insurance premium out of the llc account or my personal account if married filing jointly?

Answer

You essentially have the process down:

1. Form your single member LLC.

2. Open a business checking account in your LLC's name.

3. Have checks from your clients made out to your LLC.

4. Deposit those checks into your LLC bank account.

In addition to these steps, you also want to pay all your business-related expenses from your LLC checking account.

That means everything from web hosting to postage, to parking, to rent for an office space.

Assuming that your LLC makes money after all expenses, you can distribute those profits to yourself at any time.

The process for distributing profits from your LLC to yourself personally is simple -- write a check from the LLC's bank account to yourself personally.

This is not technically a "salary", in the sense that the LLC must withhold taxes.

Remember than an LLC is a pass-through tax entity. Any profits or losses from the LLC flow through directly to your personal income tax forms through the Schedule C (assuming a single member LLC).

Write "profit distribution" or something similar in your LLC's check to yourself.

In terms of risks to your corporate veil, this would only be an issue if your LLC was operating at a loss, and yet you kept writing checks to yourself, thus defrauding your LLC's creditors.

But, if your LLC is turning a profit, you clearly have the right to withdraw that profit personally.

The key is to keep good accounts for your LLC.

Because your LLC doesn't withhold taxes for you like an employer would, you must pay estimated taxes on your own.

An explanation of quarterly estimated taxes, and the forms, are found at www.irs.gov , search for "Form 1040 ES".

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Salary , banking, and expenses - self-employed vs llc

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Dec 29, 2010
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File Federal Taxes as S-Corp
by: Anonymous

From what I've researched your better off tax-wise electing to file as an S-Corporation if if you're a single entity(person) LLC. My understanding is if you pay yourself a moderate salary(but something not too low for what work you're performing) that-that salary would be subject to the Self Employment tax(15.3%) and the remainder(monies) could be taken as a distribution and only be subjected to regular income tax. For example to make the math easy, lets say you make $100k as a self employed consultant, basically you'd have to pay about $15,300 in SE taxes+regular income tax (~20%), whereas if you paid yourself a salary of lets say $40k you'd pay $6,120+regular income tax on the remaining $60k.

Aug 21, 2008
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thanks
by: Anonymous

Thanks for correcting me on the health insurance expense. I appreciate it. Can you point me to an IRS document (and/or answer yourself) that clarifies what benefits can be paid by one's LLC? For example, is it limited strictly to health and life insurance, or can it include other benefits (e.g., health club membership, etc.)? Thanks.

Answer

The main publication on business deductions is this document:

http://www.irs.gov/pub/irs-pdf/p535.pdf

Many deductions along the lines you're discussing--that used to be available to corporations--are now eliminated.

For example, most health club, social club, dining club memberships are no longer tax deductible. Meals are subject to a 50% limitation, and so on.

Generally, the deductions available to corporations are available to LLC members. Health insurance premiums were a big gap in the law, which was fixed (mostly) in 2002.

Aug 20, 2008
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added non-expert comments
by: Anonymous

I wanted to add a couple of comments based on what my CPA told me (and I have NO first-hand expertise on this myself):

First, as for benefits, I was told a single member LLC, unlike a corporation, cannot pay benefits such as life or health insurance premiums. The LLC can of course pay all business-related expenses, but life insurance, for example, is a personal benefit that should not be paid from the LLC account, it is not a deductible LLC expense. (Imagine this taken to the extreme: you could decide your LLC provides you housing, a car, meals, etc.) Just an FYI, I have no expertise.

On the subject of operating and payment documentation, I understand that none is required, especially for a single-member LLC. However, an Operating Agreement can't hurt, and this is were profit distributions could be spelled out, if desired. And, certainly keep a record of the "profit distribution" payments.

Note From Simon

Thank you for your clarification.

You are right to bring up the distinction about "business" vs. personal expenses.

You cannot deduct personal expenses from your LLC's revenues to reduce its profits (or increase losses).

In other words, its not which entity that writes the check that determines deductibility, but rather the nature of the expense.

Business expenses are deductible, personal expenses are not.

When it comes to health insurance premiums,however, you CAN take a deduction for premiums paid if your were self-employed and show a profit on your Schedule C.

See line 29 of your Form 1040.

From the IRS:

"You may be able to deduct the amount you paid for health insurance for yourself, your spouse, and your dependents if any of the following applies.

1. You were self-employed and had a net profit for the year.
2. You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.
3. You received wages in 2005 from an S corporation in which you were a more-than-2% shareholder. Health insurance benefits paid for you may be shown in Form W-2, box 14."

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