How to Pay Myself From My LLC

http://smallbusiness.chron.com/pay-myself-llc-3658.html

by Tom Chmielewski, Demand Media

There are two ways to pay yourself as a limited liability company member manager, as LLC owners involved in running the business are called. You can withdraw money from the company accounts, or you can give yourself a salary. Yet which method of payment you can use depends on the federal tax classification you choose. The choices are not easily interchangeable.

Step 1

Withdraw funds from the company account to your personal account to pay yourself if your LLC files its taxes under the default classifications from the Internal Revenue Service. 

The IRS by default considers a single-member LLC as a “disregarded entity” for tax purposes and treats it as a sole proprietorship.

The IRS treats multi-member LLCs as a partnerships under default rules. Under the default classifications, an LLC member cannot receive a salary.

Step 2

Record each personal withdrawal as an “owner’s withdrawal.”

If you use a computer accounting program, create a separate account item for owner’s withdrawals. These withdrawals are not considered a company expense. For a single-member LLC, you pay self-employment tax on the company’s entire profit. The amount of owner's withdrawals does not raise or lower your tax. For a multi-member LLC, you pay self-employment tax on your share of the profits.

Step 3

Elect to change your LLC’s tax classification before paying yourself a salary. File IRS Form 2553, Election by a Small Business Corporation, to be classified as an S Corporation, or Form 8832, Entity Classification Election, to be classified as a C Corporation. The election does not change the actual legal structure of the LLC, but it does require member managers to be paid a regular wage.

Step 4

Select a “reasonable wage” for yourself. The IRS requires that a member manager’s wage meets industry standards for the type of business you’re in. The LLC pays all payroll taxes and withholdings for employees, including yourself. Report your wage on your personal tax return as earned income.

Step 5

Report any share of the LLC's profit you receive in addition to your salary as "passive income" on your personal tax return. The IRS considers this unearned income that is not subject to employment taxes, though you will have to pay income tax on it.