Paying Yourself

As an LLC owner, you have several options for paying yourself, including draws and guaranteed payments. It’s crucial to understand how these methods work to ensure you’re compliant with tax laws and making the most of your hard-earned cash. In this blog post, we’ll break down the ins and outs of paying yourself as an LLC owner.

Draws

A draw is a payout of profits to LLC owners, typically taken throughout the year. Unlike a salary, draws aren’t subject to payroll taxes, but they are subject to income tax and self-employment tax.

Draws don’t count as a business expense, so they don’t lower your LLC’s taxable income. It’s also important to avoid taking excessive draws, as this can drain your business’s cash reserves and put it in a tough spot financially.

LLC & S-Corp

Guaranteed Payments for Partner LLC Owners

Guaranteed payments are especially relevant for LLCs with multiple owners, as they provide a way to compensate partners for their services to the company. These payments are considered a business expense, so they can be deducted from the LLC’s taxable income. Guaranteed payments are also subject to self-employment tax.

Partner LLC owners should consider the value of their services and compare it to industry standards when determining fair guaranteed payments. These payments should be reasonable and reflect the services provided by each partner to the LLC. Additionally, it’s essential to have a clear agreement in place that outlines the payment structure and how profits and losses will be shared among partners.

By understanding the role of guaranteed payments in a partner LLC, owners can ensure that everyone is compensated fairly and that the business is in compliance with tax laws.

S-Corporation Election

LLC owners can choose to be taxed as an S-corporation, which allows them to receive a salary through payroll. As an S-corporation owner, you’re considered an employee of your company, so your salary is subject to payroll taxes but not self-employment tax.

To elect S-corporation status, LLC owners must file Form 2553 with the IRS and meet specific criteria. While S-corporation election can offer tax benefits for some LLC owners, it also involves additional administrative and compliance responsibilities. It’s essential to consult with a tax professional before making this decision.

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Taxes

Takeaway

Getting paid as an LLC owner requires careful consideration of tax laws and financial implications. Draws and guaranteed payments are common methods for LLC owners to receive compensation, and S-corporation election is another option for those who qualify. By understanding the pros and cons of each method and consulting with a tax professional, LLC owners can make informed decisions that support their financial goals and ensure compliance with tax laws.

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