Paying yourself from an LLC

The whole essence of setting up every business is to make money in the form of profits. If you have established an LLC, then you are likely to receive an income from it just like with other types of businesses. There are a few options on how to pay yourself from your limited liability company. They include:

  1.     A salary

One of the ways to pay yourself from your LLC is through salaries but you will have to be hired as an employee. In this case, the LLC will deduct your salary as one of its business expenses will withhold taxes and FICA. If you have been hired in an LLC that is organized like an S corporation, you must ensure that what you are being paid as salary matches with the salaries of similar professionals in your area. The IRS is so particular about this rule in a bid to prevent LLC members from maximizing their income through distributions and also evading employment taxes for their salaried roles. Tax professionals in most states always require that LLC members who are also employees receive 60 percent of their pay in the form of salaries and 40 percent in dividends to stay away from IRS problems.

  1.     Profit distribution

If your LLC is formed as a partnership or a sole proprietor type of entity, you can be paid as a member through the distribution of profit. In such situations, members will be distributed an amount of money that is equal to their ownership position. For example, if you own one-quarter of the LLC, you will receive one-quarter of the profits.  But then, you will need to report the distribution income on your US individual tax return.

  1.     Draw as payment

Another option of getting paid from your limited liability company is by receiving a draw. A draw is more like an advance of profits that is paid to members. You can opt to receive a draw if you think you need a regular income but can’t wait until when profits will be distributed. The draw is typically paid in full but while you wait to receive whatever profit is left during profit distributions. For example, if you receive a draw of $12000 a month but your profit distribution totals $13000, your LLC will keep $12000 as payback on your draw and you would receive $1000. The balance of your profits would then be given to you when all profits are officially distributed. Note that you are still expected to report the draw on your taxes as if it were a distribution.

  1.     Guaranteed payment

This is a great payment option for a member who needs an ongoing income but doesn’t want to be an employee of the LLC. If you chose this option, your LLC will consider your guaranteed payment as a tax-deductible expense that is subject to taxes such as your estimated income taxes and your self-employment taxes. It is worthy to note that guaranteed payments are always paid irrespective of whether or not the LLC makes profits, so you can be earning some money while waiting for your business to start making profits.