Individuals may form a limited liability company LLC to prevent themselves from being liable for their businesses. One question that an entrepreneur may have is which choices they have to pay themselves from the business. Business owners should consider different factors before they decide if they want to receive their income in the form of a draw or regular income. Businesses must remain funded so business owners should keep enough money in the LLC to run the organization.
If a business owner is an employee of their business, they can receive a regular paycheck throughout the year. This can assist business owners if they need a steady source of income. It’s required for a business owner to take part in the business to accept income from the business and have a defined role in the company.
If there are several owners of the LLC, and they all work in the business, then it’s necessary to pay all the owners some form of salary. As an LLC, it is not permissible to pay one owner and not compensate the other owners for the work they do. If the other owners of the business do not function in a managerial capacity, then it is acceptable to only compensate one owner with the managerial function in the corporation.
If an LLC pays employees, then the business considers this compensation a part of its operational expenses. It’s necessary to know the industry standards for compensation to comply with the IRS guidelines concerning what is acceptable wages for each position. Employees can receive bonuses and that includes the LLC owners. Businesses must pay sensible bonuses to the employees and partners of the LLC based on federal guidelines.
Business owners who choose to operate their businesses as corporations must pay their members salaries that are consistent with the role they have in the daily operations of the business. This requirement is to assure the LLC members have adequate pay for their employment. A business owner must complete a W-4 if they work for the LLC and comply with the payroll guidelines that are set up by the IRS. If the LLC pays the owner as an employee, then they will have taxes taken out of their paycheck from the income that they earn from the business. The IRS requires the owners to file a federal income tax return by the April 15th deadline.
Owners can receive distributions from the profits the business earns each year. All owners of the LLC have a capital account that contains the percentage of the LLC that they own. Distributions occur at the end of the year, according to the ownership percentages of the LLC.
When an LLC owner takes a draw from the business, they can do so by receiving a check from their business and moving the money to their personal banking account. An owner can receive payments from a drawing account based on the profits the business earns each year. An owner who expects to receive $24,000 in profit from the business then they can receive a draw of $2,000 per month in compensation. When a business earns more profit than estimated, the owner would receive the remaining balance of their share of profits. For a single-member LLC, if the business earns an additional $5,000 profit then the owner would receive an additional $5,000 payment.
Compensation for LLCs
An LLC owner can receive multiple types of income from the business. If an individual receives a regular income from the LLC, the business can still pay the owner a distribution. For a single-member LLC, the business owner will file the Schedule C when they complete their federal tax return. When there are several members of an LLC, the business is a partnership on the annual income tax form because the LLC is required to file that shows how business owners receive profits from the organization.
An LLC can hire an owner to work as an independent contractor. As an independent contractor, it’s required to file a W-9 to work for the LLC and the business with file an additional form the 1099 miscellaneous form on behalf of the employee at the end of the year for federal taxes. As an independent contractor, the owner is required to pay taxes on the income that they earned from the business.
Business owners cannot compensate themselves for any income that they desire. Business owners cannot pay themselves income that contradicts what the business has earned. Business owners cannot pay themselves $20,000 a month if their business has only earned $12,000. It’s also necessary to consider the other compensation provided to the other employees and partners of the LLC.
A business owner should consider the amount of debt that the business uses when considering the compensation, they desire to receive from the business. It’s necessary for business owner to not be strict when considering the salary that they desire to get from the business to avoid receiving excessive compensation from the business. There may be months when the business generates more income than others which is one downfall of running a business.
Single-Member LLC Income
If a business owner operates an LLC as an individual, then they can take income from the business. The owner cannot earn income if an LLC is not profitable. This means that their personal income from the business comes from the profit that the business has earned. When someone owns an LLC as an individual, their income is not like a normal employee’s wages because there are no deductions taken out of the owner’s compensation. The owner would need to pay taxes to the IRS from their income in quarterly installment payments throughout the year because there are no taxes withheld from their salaries throughout the year. The owner would need to estimate their taxes based on the income they receive from the business. Consult a certified public accountant CPA for assistance with estimating the quarterly income taxes.
It is not required for the owner of an LLC to receive compensation. An owner is required to pay taxes on the income that the LLC earns. This is because the LLC is a part of the business owner’s tax return.
There are federal guidelines issued by the Internal Revenue Service on what is an acceptable salary for an LLC, owner. There are considerations the federal government uses to determine what is acceptable. So, it’s necessary to consider the work that an individual performs, the work hours, and the compensation that is provided for a similar employee based on industry standards for that level of experience.
A self-employed person will have to pay taxes on their self-employment and file their federal return to the IRS. These factors are necessary to consider when determining what the revenue and the profit are in the business to determine what income is available to pay the owners of the LLC for the work they perform.
As a single-member LLC, the profit is personal income for the business owner. This means that the business owner pays income taxes and employment taxes, which include Social Security and Medicare taxes that self-employed individuals pay.
Multi-Member LLC Income
Every owner in an LLC that has over one member pays taxes. Each owner of the LLC must include a Schedule K-1 in their income tax form when they file their federal tax returns. Each business owner must consider what they are worth to their business and to their industry when they are determining the salary that they receive.
There are things that an LLC owner should evaluate before they determine what salary is acceptable for their work. It is good for business owners to look to see the revenue coming into the business and determine what the profit is based on the expenses that the business pays for the products and services used in operating the business. If the expenses are high, then it may be necessary for the owners to take a pay cut if the income that they received is too much for the business to pay based on its current operating expenses.
Businesses may have employees they need to pay. Owners should pay their employees their paychecks and then determine their pay based on an amount that factors into the expenses and employee salaries. Standard practice is for a business owner to not receive compensation is more than half of the profits to maintain the business. If a business is struggling to earn a profit, then the business owners should lower their salaries to maintain the business. This is something that partners in an LLC can meet and discuss and adjust their incomes based on the profit the LLC earns.
If a business owner is a staff member, the business pays corporate taxes. An LLC may need a payroll service if the business operates as a corporation. The payroll service takes deductions out of the income the business owner receives in a single-member LLC or multi-member LLC as required for a corporation. This may cause additional tax concerns that the business owners should discuss with a CPA.
The members of the LLC must determine what the taxes are in the business so they know of the taxes that are necessary to operate the business based on the compensation that the members receive from the LLC. The business owners can consult their CPA to determine but the strategy that is most appropriate for the business.
If a partner is working for the business, then the income that they receive from the profits of the business is self-employment income. This practice keeps the partner from receiving dividend income taxed at a lower rate because the owner works for the business and is not an investor.
Business Plan Development
Everyone who is a member of an LLC should decide how they will receive their income from their business. Some members may receive income each month basis or receive money less often. By considering the options they have, LLC members can determine what is best for them and their business to sustain the business. Owners may receive compensation based on the purpose of the business. Members of an LLC may form a company to meet a short-term purpose such as buying and selling a real estate property. Business owners should determine how long they would like to operate the business. Some businesses may have a long-term purpose. The LLC members can create a business plan and clarify how the owners and staff will receive compensation each year and their duties to stay on track with the goals they set for the company. Criteria for company bonuses can be documented in the business plan for all partners and staff.