How Do I Pay Myself From My LLC | TRUiC - How To Start An LLC

How to Pay Yourself in a Single-Member LLC

As a single-member LLC owner, you can pay yourself:

• a distribution (or draw) that by default passes through to your individual tax return, or
• a reasonable salary and distribution as an S corporation (S corp)

Most small business owners choose to pay themselves a distribution that passes through to their individual tax returns.

Being taxed as an S corp makes sense for businesses that are generating enough profit to pay the owner a reasonable salary and at least $10,000 in annual distributions.

How to Pay Yourself as a Default LLC (Pass-Through Taxation)

When your single-member LLC (SMLLC) is taxed in the default way by the IRS, you can choose to pay yourself a distribution. The distribution, or draw, then passes through to your individual tax return. This is known as pass-through taxation.

Pass-through taxation means the LLCs profit passes through to the member’s individual tax returns. This is the way the IRS taxes LLCs by default.

Pass-through taxation allows single-member LLCs to avoid “double taxation”. This means the IRS only taxes your business’s total profit one time.

How Pass-Through Taxation Works For A SMLLC

Imagine your single-member LLC earns $6,000 in profits one year. You report these earnings on your personal tax return.

From this $6,000 you decide to take $1,000 as a distribution. Because you already paid income tax on the whole $6,000 on your tax return, you don’t have to pay any more income tax on your $1,000 distribution.

You will have to pay FICA self-employment tax on only the $1,000 distribution.

IMPORTANT: The amount you pay yourself from your LLC can have serious implications. It is crucial that you keep enough funds (or capital) in your business bank account to maintain your LLCs corporate veil. To learn more about this important topic, read our Maintain Your LLC’s Corporate Veil guide

When Is It Best To Choose Pass-Through Taxation?

Most small business owners choose to pay themselves a distribution that passes-through to their individual tax return. The S corp and C corp tax statuses only make sense for businesses have a significant annual net profit.

Small businesses usually carry very little profit from one tax year to the next because their owners reinvest most of the profit to help the business grow.

The default LLC status is best suited for small businesses with these characteristics:

• Their owners reinvest profit back into the business to promote growth

• The cost of bookkeeping and payroll services would outweigh the tax benefit of an S corp or C corp

For more details about choosing between the default LLC status and S corp, read our LLC vs S Corp guide.

Form An LLC

Visit our free Form An LLC guide for step-by-step instructions for starting your LLC.

How to Pay Yourself as an S Corp

If you are an LLC owner that chooses to be taxed as an S corp, you are considered an employee of the business and you must pay yourself:

• a reasonable salary
• at least $10,000 in distributions (for the S corp to make sense financially)

The benefit of electing the S corp tax classification is being able to avoid paying FICA self-employment taxes on your distribution(s).

S corp owners pay only income taxes on distributions but must pay income tax and FICA self-employment taxes on their salaries.

What is a reasonable salary for an S corp owner? A “reasonable salary” is any salary that you would pay someone to do the same job duties that you perform.

We recommend using ZenBusiness to form your S corporation.

How S Corp Taxation Works

Imagine you are the sole owner, shareholder, and employee of your S corp LLC. Your business made a $100,000 profit last year.

You decide that the average salary for someone in your field with your experience is $80,000.

You pay yourself:

• $80,000 as a salary
• $10,000 in distributions

When it’s time to file taxes, you will report your salary from your W-2 on your individual tax return. Your portion of the FICA taxes will automatically be taken out of your salary by your bookkeeper or payroll service.

The S corp will file its own tax return that reports business income, profits, and losses. The business will pay their portion of FICA taxes as well as FUTA taxes on your employee salary.

You will report your distributions on your individual tax return and you will only pay income taxes on them.

When Is It Best To Elect S Corp Tax Status?

We estimate that if a business can pay its owner a “reasonable salary” and at least $10,000 in distributions per tax year, then it would make sense for a single-member LLC to elect the S corp classification.

NOTE: Most small businesses don’t earn enough profit in the early stages for it to make financial sense to elect S corp status.

S corp owners save about 16% on taxes by not paying FICA taxes on distributions. Tax savings must be balanced against the cost of payroll and accounting services required to maintain S corp status.

How to Pay Yourself as a C Corp

Like an S corp, LLC C corp owners must pay themselves a “reasonable salary” for their services to the business.

Business owners pay both FICA and income taxes on their salary but any dividends are only subject to income taxes. Unlike S corps, the C corp itself must also pay a corporate tax on the total profits.

How C Corp Taxation Works

You are the sole owner, shareholder, and employee of your C corp LLC. Your business made a $500,000 profit last year.

You determine that the average salary for someone in your field with your experience is $80,000. You pay yourself the following:

• $80,000 as a salary
• $10,000 in dividends

When it’s time to file taxes, you will report your salary from your W-2 on your individual tax return. Your portion of the FICA taxes will automatically be taken out of your salary.

The C corp must file its own tax return that reports business income, profits, and losses. The company must pay their portion of FICA taxes as well as FUTA taxes on your employee salary.

The C corp must also pay the 21% corporate tax on its profits.

Since you are the only shareholder, your dividends will be shown on Form 1099-DIV. You will then report these dividends on your individual tax return and pay income tax on them.

When Is It Best To Elect C Corp Tax Status?

LLCs taxed as C corps have the following characteristics:

• investor and capital venture friendly
• increased tax deductions and qualifying business expenses
• increased complexity and maintenance costs
• 21% tax rate and double taxation

C corporations attract investors because of their straightforward tax requirements. Investors only have to pay taxes on what dividends they’ve received. In other LLC tax scenarios, investors would have to pay taxes on profit even if they didn’t receive a disbursement/dividend.

Certain tax savings must be balanced against the 21% corporate tax rate as well as the cost of payroll and accounting services required to maintain C corp status.