How do I pay myself from LLC? If you own an LLC you can pay yourself by receiving a paycheck from the company for hours worked and by receiving a distribution of company profits. These are the two most common ways of getting paid from an LLC company. See below for more information.
HOW DO I PAY MYSELF IN AN LLC?
Have you formed an LLC company and now you are asking yourself the question – “How do I pay myself in an LLC?” Don’t worry, it’s a pretty straightforward process.
There are a few things you’ll need to consider to assess which option best suits you. But, we’ll take you through your payment options one step at a time.
To keep things simple there are two ways you can get paid by an LLC that cover the vast majority of situations.
You can either categorize yourself as an employee of the LLC and receive wages, or you can treat yourself as an owner and receive a distribution from the profits. Note, that an LLC owner is also called a member.
Also, these two options are not mutually exclusive. If you own an LLC you can pay yourself using both methods – that means you can receive a wage and a distribution from profits.
JUMP TO CONTENTS
- RECEIVING A WAGE FROM YOUR LLC
- RECEIVING A DISTRIBUTION OF LLC PROFITS
- RECEIVING A WAGE AND A DISTRIBUTION
- SINGLE MEMBER vs MULTI MEMBER LLC
- WHAT ABOUT CORPORATE LLC COMPANIES?
- FREQUENTLY ASKED QUESTIONS
RECEIVING A WAGE FROM YOUR LLC
One of the most common ways to get paid from your LLC is to receive a wage from the company. This method provides a way to receive a regular payment that you can rely on during the year. It’s a great of establishing a regular income from the company.
ROLE & RESPONSIBILITIES
However, several criteria must be met before you can legally begin receiving a wage from your LLC. First up, you must be actively working in the company. This means you need to be applying hours to the actual running of the company.
In addition to this, you need to have a clearly defined role with a corresponding set of responsibilities. So, this rules out creating a role that exists in name only and doesn’t come with any real-world duties in the running of the company.
MULTI MEMBER LLC
If your LLC has multiple members, (multiple owners), all members who work for the company need to receive a wage. This means one member who has a role in the company cannot receive a wage while another member who also works for the LLC does not receive anything.
WAGES MUST MEET INDUSTRY NORMS
Any wage received from an LLC must be in line with industry standards. For example, if a member is working in an accounting role and taking care of the company accounts – they can only receive a wage that is in line with other accounting roles within the industry.
The IRS only allows members to receive wages that they consider to be standard across the industry. So, be careful you apply these assumptions wisely and adjust member wages accordingly. Member wages are classed as an operating expense and are deducted from company profits.
TAX ON WAGES
To determine how much tax you need to pay on your LLC wages you will need to complete a W-4 form and file it with the IRS. The LLC will then pay you as an employee and any income tax that is due on your earnings will be withheld for the IRS.
RECEIVING A DISTRIBUTION OF LLC PROFITS
The second way to get a payment from your LLC company is to receive a distribution from company profits. These distributions are made at year-end when the company profits are finalized. Unlike a company wage, a distribution results in a single payment every 12 months.
MULTI MEMBER DISTRIBUTIONS
If your LLC is multi-member profits will be divided in line with what percentage of the company each person owns. This detail should be established in the LLC operating agreement and the percentage that each member owns is called their capital account.
For example, if there are four members in your LLC and each member holds 25% of the company, then the company profits will be divided equally between each of the four members. If the company earned a profit of $100,000 then each member will receive $25,000 as a distribution.
TAX ON DISTRIBUTIONS
Paying tax on LLC distributions is very straightforward. All you need to do is declare the distribution as part of your personal earnings and pay income tax on the payment received. You also need to file a Schedule C tax form, (form 1040), with the IRS to report any income or loss incurred by the company.
If the company is a multi-member LLC, the IRS will treat it as a partnership. In this scenario, each member will report their earnings separately and pay income tax on any distributions received. The company then needs to file form 1065, U.S. Return of Partnership Income, to report how the profits were distributed amongst its members.
YOU CAN RECEIVE A WAGE AND A DISTRIBUTION
While discussing ‘How do I pay myself from LLC’ we have outlined that receiving a wage and a distribution are the two most common ways of getting paid. However, as an LLC member, you can earn a wage from the company and receive a distribution at year-end when company profits are being shared amongst the owners.
Remember, to legally justify receiving a wage paycheck you need to hold a role in the company that involves putting in the hours. The role must be clearly defined, with real-world responsibilities, and the salary received must be in line with industry norms.
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WHAT ABOUT SINGLE MEMBER vs MULTI MEMBER LLC?
A single-member LLC is classed as a “disregarded entity”. This means that as far as taxation is concerned, the IRS views the LLC and the single-person owner as one entity.
This means that company income will be classed as personal income for the owner. This is the same tax arrangement as a sole-proprietorship.
Multi-member LLCs are classified as partnerships by the IRS and benefit from ‘pass-through’ taxation. This means the distribution will pass from the company to the LLC member without being taxed.
However, members that receive payment pay income tax on the distribution received – regardless of whether they take it from the company or not. Members can choose to draw as little or as much of the distribution as they are entitled to.
WHAT ABOUT CORPORATE LLC COMPANIES?
A corporate LLC is an LLC company that has chosen to be classed as an S corporation or C corporation for tax purposes. Owners of a corporate LLC get paid by receiving a salary from the company.
This salary will be processed through the company’s payroll in the standard manner and any taxes due will be withheld by the LLC. Any salary received by an LLC member must be in line with industry standards for the position held.
In addition to receiving a salary, a corporate LLC member can also receive a distribution from the company profits. Distributions will not be subjected to payroll taxes but are considered taxable income.
HOW DO I PAY MYSELF FROM LLC FAQ
WHAT IS A SINGLE MEMBER LLC?
A single-member LLC is an LLC that has only one owner – also known as a member. Single-member LLCs are regarded as sole proprietorships by the IRS for tax purposes.
WHAT IS A MULTI MEMBER LLC?
A multi-member LLC is an LLC that has more than one owner – also known as members. Multi-member LLCs are regarded as partnerships by the IRS for tax purposes.
WHAT IS A CORPORATE LLC?
A corporate LLC is an LLC that has chosen to be classified as a C-corporation or S-corporation for tax purposes. To register your LLC as a corporate entity you need to process a filing with the IRS.
IF YOU OWN A LLC CAN YOU RECEIVE A PAYCHECK AND A DISTRIBUTION?
Yes, if you own an LLC company you can receive a paycheck for wages and a distribution of company profits. The two methods of payment are not mutually exclusive.
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ABOUT THE AUTHOR
Rachel joined the My LLC Guide team in the spring of 2021. She is a graduate of the McCombs School of Business at the University of Texas. She studied business administration and has a particular interest in strategic decision-making, risk management, and legal and regulatory business requirements.
She is a founding member of a business advisory company that she formed with a group of like-minded McCombs alumni. Outside of business, Rachel likes to volunteer at the Central Texas food bank where she helps prepare food donations for distribution. She is also a keen fan of music and dance and enjoys attending live performances.