Owners of Limited Liability Companies (LLCs) have several options for paying themselves, depending on their preferences, the structure of the LLC, and tax considerations.
Here are some common methods for LLC owners to pay themselves…
- Owner’s Draw – One common way for LLC owners to pay themselves is through owner’s draws, also known as distributions. With this method, the owner withdraws funds from the LLC’s profits or reserves for personal use. Owner’s draws are not considered salary or wages and are not subject to payroll taxes. Instead, they are treated as a return on the owner’s investment in the business and are reported as such on the owner’s personal income tax return.
- Guaranteed Payments – LLC owners who actively participate in the management or operations of the business may receive guaranteed payments for their services. Guaranteed payments are similar to a salary or wage and are considered a deductible business expense for the LLC. They are reported as ordinary income on the owner’s personal income tax return and are subject to self-employment taxes, including Social Security and Medicare taxes.
- Salary – Some LLC owners choose to pay themselves a regular salary, similar to an employee of the company. Paying yourself a salary can provide stability and consistency in income, but it also entails additional administrative tasks such as payroll processing and tax withholding. Salaries paid to LLC owners are subject to payroll taxes, including Social Security and Medicare taxes, as well as federal and state income tax withholding.
- Profit Distributions – LLC owners may receive distributions of profits based on their ownership percentage in the business. Profit distributions are typically made at the end of the fiscal year or regular intervals determined by the LLC’s operating agreement. Like owner’s draws, profit distributions are not subject to payroll taxes and are reported as income on the owner’s tax return.
LLC owners need to consult with a tax professional or accountant to determine the most appropriate method for paying themselves, taking into account their financial needs, tax implications, and compliance requirements. Also, LLC owners should ensure that any payments made to themselves are documented properly and by the LLC’s operating agreement and state regulations.
