Paying Yourself in an LLCDifferent Ways an LLC owner or member can receive compensation

Adiste Mae

There are many ways business owners pay themselves for their stake in the business.

But every payment transaction corresponds to tax obligations, which must be considered carefully.

A Limited Liability Company (LLC) is created in the first place for members to enjoy limited liability protection.

It means the creditor cannot go after the owner’s personal assets whenever there are remaining debts unsettled.

But as an LLC owner, you might be asking how to pay yourself, and what will be the accounting treatment of your compensation?

There are two ways owners can legally receive cash in return for services or investments made: declare themselves as an employee and receive wages from the company or treat themselves as LLC members and receive profit distribution in return.

Paying Yourself as a Wage Earner

Paying Yourself as a Wage Earner

Legally declaring yourself as an employee is advantageous for you if you seek a regular source of income.

Before receiving compensation, you must become a part of the organizational chart.

This means you must have a management role and contribute to the business’s day-to-day operations.

In case an LLC has multiple owners and all perform services in the organization, all of them must receive relative compensation.

It is against the law to pay only one employee when all others have the right to receive one.

And if it’s only you who performs management duties, you alone have the right to receive compensation.

The accounting treatment for employees’ wages is an operating expense to be deducted from the LLC’s generated income.

IRS sets an allowable amount of compensation for services made and it must also be within the compensation table per industry.

Apart from the employee’s salary, you, as a member-employee is also entitled to an incentive or bonus that is within the management’s policy.

Your salary is subject to a withholding tax.

To know the amount withheld, you need to file using IRS Form W-4.

You belong to the W-2 employee categorization, and the company will withhold a relative amount from your salary.

Receive Distributions from LLCs Profits

Receive Distributions from LLCs Profits

Another way to receive a return is through profit distributions.

The members are entitled to receive a certain percentage of profit based on their investment percentage.

For example, the LLC generated a net profit of $250,000, and you and two other members equally invested in the company owning 33.33% interest.

You will then be entitled to an amount of $83,332.5 profit distribution.

Members can agree to set up monthly drawings – an average amount they have agreed to receive each month relative to their average expected profit distribution.

For example, based on your investment percentage, the average amount of your year-end profit distribution is $15,000.

Instead of receiving a one-time payment, you intend to receive monthly drawings of $1,250, and when the actual profit distribution is $20,000, the $5,000 excess will be your year-end profit distribution.

If you are single-member LLC, all your income as an employee and profit distribution will be filed and reported as your income tax declaration.

You will follow the Schedule C form and declare all generated income and losses incurred by LLC.

On the other hand, the LLC must file IRS Form 1065 which constitutes the manner of profit distribution among its members.

Employee salary and profit distribution do not always come together.

You can only be a member and receive profit distribution if you do not perform any management role or receive compensation.

However, when you have a management role, you will be able to receive both compensation and profit distribution.

Work as an Independent Contractor

Providing services as an Independent Contractor is also a way to pay yourself in an LLC entity.

For example, The LLC of which you are a member needs to improve its trade logo.

If you own another business that does graphic designing, you can hire yourself as an independent contractor, and you are entitled to a relative contractor’s fee.

For independent contractors, the income must be filed with the company using IRS Form W-9, while the LLC will file an IRS Form 1099-MISC at each yearend.

Choose Not to Receive Payments

There is also an option of not receiving any other income payment aside from profit distribution, which can be kept with the LLC.

The income tax will still have to be filed at year end since the profit still passes through to you as your personal income.

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  1. Internal Revenue Service "About Schedule C (Form 1040), Profit or Loss from Business" Page 1 . November 2, 2022

  2. Duquesne University "What Are the Taxes for an LLC?" Page 1 . November 2, 2022

  3. Brookings "9 facts about pass-through businesses" Page 1 . November 2, 2022