How Do I Pay Myself From My LLC?

That is a loaded question! Because an LLC is a disregarded entity for IRS purposes, your LLC may be structured for tax purposed several different ways and that will determine how you pay yourself.  We will look at each situation in this blog.

Single Member LLC as a Sole Proprietor

As a single member LLC, your income is reported as a sole proprietor on Schedule C of your Personal Income Tax Return, Form 1040.  To “pay” yourself, you would simply write yourself a check or transfer money to your personal bank account.  This money is not taxable since it is a distribution of profit from the company and ALL the profits will be subject to income tax along with self-employment tax.  It is also not taken as an expense since it is not taxable!

Multiple Member LLC as a Partnership

As a multi-member LLC, your income defaults to being reported as a Partnership.  In this case, you would pay yourself and the other partners for services to the company as a Guaranteed Payment.  This would be a check to the Partner with no withholdings or payroll taxes taken out.  Guaranteed Payments are typically subject to Self-Employment taxes.  They are taken as expenses to the company and as such are income to the Partner at the Personal level.  Partners may also take profit distributions that are not taxable to the Partners since entire profit will already be taxed.  These distributions are also not expenses to the Partnership.

LLC electing to be taxed as an S Corporation

When an LLC makes an election to be taxed as an S Corporation, the members must pay themselves a reasonable salary.  Members become traditional employees with withholdings and payroll taxes withheld and matched by the company and are paid a net check through payroll.  They receive W2s at the end of each year reporting the Gross Wages that must be accounted for on their personal returns.  Since they are income to the members, they are also taken as expenses on the company books.  Members may also take profit distributions that are not taxable since the profit of the company is passed through and tax paid on the entire profit.  These profit distributions are no expenses to the S Corporation.   

LLC electing to be taxed as an C Corporation

When an LLC makes an election to be taxed as an C Corporation, the members must pay themselves a reasonable salary.  Members become traditional employees with withholdings and payroll taxes withheld and matched by the company and are paid a net check through payroll.  They receive W2s at the end of each year reporting the Gross Wages that must be accounted for on their personal returns.  Since they are income to the members, they are also taken as expenses on the company books.  Members may also take profit distributions that are TAXABLE, referred to as Dividends.  This is one downside to the C Corporation, money being taxed twice.  The corporation pay tax on company profit and the stockholders/members pay tax when that profit is taken out.