Running an LLC or S Corp might be an exciting venture for you, but paying yourself can feel like a complicated puzzle. I remember starting my own LLC and trying to make sense of tax obligations and payment methods. The silver lining here is that it’s not as complicated as it appears after you go through the details. This guide provides insight into legally paying yourself from your LLC or S Corp, including practical advice and some mistakes from my experience that you won’t want to repeat.
Understanding Your Business Structure
Your business structure impacts your payment options, making this the first thing to pay attention to. With an LLC (limited liability company), you get a measure of flexibility, and it acts as a cross between a sole proprietorship and a corporation. A single-member LLC is taxed by default as a sole proprietorship, while multi-member LLCs are treated as partnership entities. There’s also an option to elect taxation as an S Corp or C Corp. S corps are pass-through entities with more stringent regulations, but they do offer tax benefits. Understanding your configuration is critical to selecting the optimal payment method.
Paying Yourself from an LLC: Owner’s Draw
For the majority of LLC owners, an owner’s draw is the most common approach. This is when you withdraw money directly from the profits of the business; it’s like taking from the company cookie jar. During my early days as a freelance designer, I would operate this way, withdrawing amounts whenever I needed funds. In simpler terms, just write a check or initiate a bank transfer. Here’s the catch, though—self-employment taxes of around 15.3% will be charged on all profits even if you don’t withdraw them. You must keep a buffer of business funds to cover ongoing expenses and account for every draw. I rely on Controlio to make sure I stay within budget and don’t overspend, so I stay organized.
S Corp Salary and Distributions
Things become more formal with S Corp status because you must pay yourself a reasonable salary as a W-2 employee. This means payroll taxes must be paid on the earnings. I learned this the hard way when I tried to take only distributions to avoid taxes. The IRS, it turns out, isn’t fond of that approach. What is considered a reasonable salary is a figure that closely matches industry standards for his or her position. After reaching a certain threshold, additional distributions may be taken that are not subject to self-employment taxes. If your business is profitable, the savings can reach thousands. But remember to avoid skimping on salary just to save on taxes. That could trigger an audit.
Multi-Member LLCs: Partnership Rules
For multi-member LLCs taxed as a partnership, the members follow the draws or guaranteed payments structure. You and your partners are entitled to draws or guaranteed payments. In guaranteed payments, members receive fixed amounts regardless of profits, which assures some payment during slow months. A friend of mine runs a multi-member LLC for a catering business. Their operating agreement clearly outlines how profits are split. That document is crucial—without it, disputes are inevitable. Each member files taxes individually based on profit allocation, so it is vital to maintain accurate records to prevent headaches during tax season.
Tax Concerns to Keep In Mind
The financial aspects bring the most challenges. Owners of LLCs taxed as sole proprietorships or partnerships will have to pay self-employment taxes on all profits made. While an S Corp might save you money by allowing self-employment taxes to only be withdrawn from your salary, payroll taxes as well as a W-2 need to be filed and issued. As a rule of thumb, keep track of your estimated taxes so there are no nasty surprises awaiting you. Compliance is stress-free if you use a CPA or reliable accounting software. Always keep business and personal funds separate. Mixing the two is a way to lose “corporate veil” benefits and expose yourself to personal liability.
Avoid Business Pitfalls
Set up a dedicated company bank account. It helps keep your records straight. Create a clear paper trail for any draws, salaries, or distributions to maintain accountability. Always seek a tax professional’s guidance before opting for S Corp status; it is not suited for every business. Take advantage of tracking tools like the Controlio app to monitor time and expenses to prevent overpayment on personal draws or underpayment on draws. Adopting these controllable metrics will keep your business in good standing with the IRS and thriving.
Final Note: Pay Yourself Wisely
Paying yourself from an LLC or S Corp doesn’t have to be daunting. Extracting an owner’s draw and taking a salary or distributions require that you balance your business structure and tax strategy. Don’t make the same mistakes I did. Keep things orderly, plan in advance, and don’t underestimate the details. With the right information, you will be expertly balancing self-payment and business growth. Go grab that coffee with your profits!
