How to get paid from your LLC (multiple scenarios)

how can you pay yourself from your llc that's the question i'm going to answer in this long format video where i'll answer this question quickly and then go into the details some of the nuances of based on your entity type your structure your income and your projections for the future can affect your strategy about how to pay yourself from your llc or corporation i will discuss that a little bit later because it is possible that you have an llc that you're an owner of an llc but you make the election to be taxed as a corporation so you must understand the default treatment of paying yourself as a single member or multi-member llcs which is a standard llc per se or what if you make the election to be taxed as an s corporation or a c corporation we will discuss that in detail now there are three ways you can pay yourself from your llc one of them and the most typical one is called the owner's draw that's when you write yourself a check you don't make any tax withholdings the llc is paying you the owner or one of the owners a distribution check a draw against the profits of the business the other way you can pay yourself is with payroll pay yourself through a salary you will withhold taxes and you will have an entire system in place to pay yourself withhold taxes send those taxes to the government file forms and so forth and the third way you can pay yourself from your llc is called a dividend which has optional withholding you actually don't need to withhold on a dividend but you can if you want to now the entity type that you choose or how you structure your llc actually affects how these payments are made so let's talk about what the contents of today's videos we're going to discuss a lot of things in detail i gave you the three ways to do it but now i'm gonna explain the nuances that you need to apply to your situation to figure out how you're gonna pay yourself so first we're gonna discuss the difference between owner's draw payroll salary and dividends which we just talked about then we're going to go into the detail of each entity type and i want you to think about an llc as of being potentially one of four entity types it can be all four of them it can be two of them it can only be one so you're gonna make the election based on your situation so the default way an llc is when it has a single owner is called a single member llc pretty easy to remember you're going to file 1040 in your schedule c if you don't you do your own taxes that's something your accountant worries about but you want to know how to pay yourself if you happen to have a single member llc we're going to start discussing that in detail secondly we'll talk about calculating the liability single member llcs don't pay taxes multi-member llcs don't pay taxes it is the owners of the llcs that pay the taxes in representation of the llc so we're going to discuss more or less how the liability is calculated then we're going to move on to multi-member llc that's an llc that is owned by two or more people this this you you will use form 1065 again if you don't file your own tax returns something for your your tax accountant to worry about this is often called a partnership this is the traditional naming convention that we use for association of two or more people doing business together which is basically what an llc potentially is when it has more than one owner so in the tax return it's actually called a partnership even though legally is called an llc now we're going to discuss the the third entity type which is an llc that made the election to be taxed as an s corporation which would file form 1120 s on the tax return and then we're going to discuss the fourth type which is llcs that elect to be taxed as c corporations and c corporations file with form 1120. again if you don't file your own returns something for your accountant to worry about this video is focused around how you're going to pay yourself and the last thing i want to discuss here is multiple entity issues this is for people that have more than one llc or a combination llc s corp c-corp multi-member single member so when there's combinations of things we're going to discuss kind of not so much tax strategies but some of the structure that is allowed when you have multiple entities so let's dive right in now depending on how you pay yourself the tax of pay the the type of payment actually affects the type of form you're required to file to the irs so for example if you have a single member llc and you pay yourself an owner's draw there's actually no reporting requirements when you report the income and expenses of your single member llc that's going to go in your in your personal tax return and the amount you paid yourself or didn't pay yourself is not reportable only thing you report is income and expenses so single member llc easy nothing to worry about if you didn't make any special elections there's no reporting requirements you just have to in your schedule c put your income and expenses and that's it now if you have a multi-member llc this is an llc with more than one owner you are going to have a form called the k1 which goes inside your partnership tax return or the form 1065 that we talked about and in that form you're actually going to see the reported amount of draws or distributions that you took so there will be a beginning balance of the capital you put into the business there will be an increase or decrease in capital based on the profits and then the decrease the final decrease in capital based on how many draws you took out what's interesting about this we'll discuss this a little bit in detail is because there's multiple owners every owner gets the k1 and every owner has its own calculation on those owner drops we'll discuss that a little bit more detail let's talk about payroll salary so typically only when somebody has a corporation an s corporation or a c corporation they start worrying about paying themselves through payroll we'll discuss it in detail this is actually a requirement a minimum requirement on s-corporations and it's sort of quasi-optional on c-corporations we'll discuss what that means and if you have an llc you may have made the election to be taxed as an s corporation or a c corporation so if you made the election you must pay yourself at least a big chunk of that payment through payroll via aw2 that's the form that ultimately gets reported to the irs that represents the amount you pay yourself to payroll with s corporations you can have both you got payroll and owner's draw or distributions with c corporations you can have both payroll and something called a dividend a dividend is only for c corporations and there's a form is a 1099 hyphen div which is the one the corporation or the llc converted to a corporation for tax purposes needs to file at the end of the year to let the irs know that this owner received some dividends so based again as we talked about earlier based on the entity type the way you pay yourself and the way you report what you pay yourself and as we dig deeper the way you pay taxes on how you pay yourself all changes now i want to make a quick note you're going to hear me say the word owner partner member or shareholder i'm using all those things interchangeably it all means an owner of the llc now the terminology is typically based on the entity type so a single member llc is typically just called the owner a multi-member llc is typically called the member or the partner a llc elected to be taxed as an s corporation or a c corporation is simply just called a shareholder but if i happen to say shareholder when talking about a partnership or partner when talking about a corporation i essentially mean the same thing all these terms are used interchangeably and it's okay if you get it wrong as long as you understand what is trying to be communicated now what exactly is an owner's draw and i'm just gonna simplify this an owner's draw or a distribution is when the owner of an llc just takes money out of the llc and puts it in the personal bank account maybe they write themselves a check no tax withholdings just a straight check maybe they take cash out of the business maybe they distribute value from the business like they take a business asset and make it their own that is called a distribution and it's only called a distribution when it's above and beyond the amount of the initial investment so if i'm an owner of a business and i put a hundred thousand dollars to start my business the first hundred thousand i take out is basically just me taking my capital back that's not a draw yet that's just the reduction of my initial capital and it becomes a draw or at least within the context of this video it becomes a draw when it's beyond your initial capital you will also hear the concept of equity equity and capital are the same concept again that's the money that you as llc owner put into the llc now let's start with single member llc is the most common type of loc in america i started my business on my own i created an llc so i'll operate under my personal name and i'm running a business a single member llc it's an llc formed in any state that is owned by a single llc owner by a single owner now if you don't make a special election to be taxed as a corporation an llc will always by default be treated as a single member llc which means that you file the tax return on your personal tax return you can pay yourself an honors draw whenever you want you can pay yourself whatever you want and there's a little asterisk there which we'll discuss in a second you don't need to withhold any tax in those payments the payments themselves are not taxable there's no tax attached to the payment although again we'll discuss the asterisks in a second what gets taxed ultimately is the the profits of the business so your income minus your expenses and because you're being taxed on the profitability of the business not the distributions you have to make estimated taxes based on the profit now i did make a little asterisk there because you can take out honors draw again no tax attached to it no tax liability directly attached to the draw as long as the draw is not above and beyond your capital we'll discuss capital in a little bit a little bit later we'll dig into that but basically it means you're not going to take new debt um you're not going to take a loan just so you can pay yourself so as long as you're not doing that and you're paying yourself from the profits of the business that are being taxed then you're going to be okay there's not going to be any additional tax on the owner draws that you take now how much tax will i pay and that's a really good question and it actually matters on your personal tax situation so i'm going to put a link in the description to the latest tax bracket what you're seeing on the screen which is what i used when i recorded this video is the 2022 tax bracket but if you're watching this in the future it's important for you to see the most updated tax bracket now just give you a general idea if you let's just focus on a hundred thousand dollars if you're a single taxpayer you're a single taxpayer you're not married and you make a hundred thousand dollars and you look in this box you look in this chart you are at the 24 marginal tax bracket that means that the first 10 000 pay 10 percent then the next between 10 000 and 41 000 and change paid 12 between 41 89 paid 20 22 percent and anything above 89 pays 24 and that's how you read tax brackets it is um a step system like you don't pay 24 on everything you pay it just in the bracket now there's one little caveat here that's really really important so even though the income tax brackets vary between 10 and 37 there's actually a little bit more tax to be paid so there's a tax called the self-employment tax and it's designed to cover for social security and medicare regular income tax doesn't fund social security and medicare employment taxes fund social security and medicare if you've ever been employed you know your paychecks are not whole because you're paying social security and medicare so a self-employment tax does is it calculates the amount of social security and medicare that you have to pay to the government which is actually 15.3 of that business's income so that's a pretty big number to think about and there are there are some limits to you know you only pay that in the first 140 150 000 and beyond that you pay a much smaller amount but for most taxpayers 15.3 percent of the first hundred and fifty thousand dollars that they make it's a pretty big number so you have to add that self-employment tax to your tax bracket so you're paying both taxes so it could get pretty steep and this is where a lot of people think about the s corporation which we'll discuss briefly which is sort of the point of this video it's not to give you a straightforward answer is to get you thinking about your options because the decisions that you make could affect how much taxes you pay now there's something called passive income like real estate rental so maybe you you create an llc because you have a real estate property in there and the income you're deriving from it it's passive income then that's different that does not pay the 15.3 percent so if you're watching this because your llc only owns a piece of real estate and you're asking yourself how to pay yourself from your llc that only owns real estate then the answer is an owner's draw forget it you don't have to complicate yourself with much single member all multi-member llc but if you don't have real estate in that property in that llc and the llc runs a business an ordinary business then you will pay that 15.3 so that's why i'm making that little nuance there because it's important for you to know that there's self-employment tax in certain income and not in others now one little tiny uh thing to add here is if you if you have a single member llc and you are the owner of that single member llc and you want to just like a really simple ballpark of just putting money away out of all the money you make for your business don't do it based on how many distributions you take or how many draws you take do it based on the profits of the business so generally what i would do rule of thumb if you make less than 150 000 dollars a year i would put away about 28 and if you make more than 150 000 a year i would put away about 32 that's 28 or 32 of the net again this is just an estimate this is not a calculated amount and the number that pertains to you might be different right so you want to put away enough so at the end of the year you can pay your taxes on the profit of your business which is irrelevant to how much money you take out but i know the purpose of this video is for you to know kind of both things how much can i take out and what are my tax implications okay how do i pay those estimated taxes so most people have a single member llc and they say hector great i'm going to tuck away 28 how do i pay that well it actually gets paid quarterly and you can do that through the irs website or you can send a check i prefer to use the irs website that's the best way to do it you can pay via ach a direct bank payment or you can pay with a credit card they will charge you a couple of points of percentage if you pay with a credit card because there's a transaction fee now the payment schedule for your estimated taxes should be the entire liability for the year that you think is going to be so that profit times at 28 or 32 again just a ballpark number you can go back to the chart and the tax bracket and get the exact number of course and you're gonna pay for the first quarter april 15th second quarter june 15th i know it's weird they're not perfect quarters third quarter uh september 15 15 and lastly the fourth quarter gets paid in january of the following year on january 15. so through the tax year you're going to estimate how much you're going to make at the end of the year and you're going to make payments if you don't know how much you're going to make then you can estimate zero but then you could pay a penalty for not prepaying those taxes so to be safe kind of take a look at the previous year and try to mimic that or as quarters progress and you have more and more information start equalizing that payment so again by the time january 15th comes along and the year has already passed you have the opportunity to make hole in that fourth quarter now how do we calculate that number so like i said we could think of a number like 28 or 32 percent but how do we actually calculate it so this is how you do it pretty simple you're going to take all your sales minus your business deductions and business deductions it's a kind of a complex topic i'm gonna put a link in the description uh to the top deductions you can take for your business so it will be a perfect video for you to watch after this to say okay what can i deduct from a business different topic altogether we take all of our income all of our sales from our business deduct the business tax deductions and now we get our taxable business income that's it so that's our taxable business income or a net profit from a business then we're going to take that taxable business income and we're going to multiply times 15.3 percent so we can figure out what our self-employment tax is again single-member llcs multi-member llcs they are going to pay this self-employment tax unless your business is passive like real estate then you're going to take your business income right your non-business income so if you have a regular job or a spouse that has a regular job you're going to add those two things together you're going to take out your personal deductions and i'll put a link on the on the description as well to talk about personal deduction as a different topic then you're going to multiply that times your tax bracket and you want to look at the tax bracket again we'll have a link in the description for that and you'll figure out more or less what your income tax is then you have to add the two things you have to add the self-employment tax and the income tax together and then minus what you've already paid via estimated taxes or what you already got withheld through a w-2 payroll or through some other mechanisms it's a lot it's a lot more complex than this i am oversimplifying it i'm just sort of assuming that that you are watching this because all your income is derived from the llc and that's the simplest way to look at it but of course everyone's situation is different now again as mentioned earlier these brackets vary between 10 12 all the way to 37 you want to take a look at that bracket we'll put a link in the description for that now the mechanic the mechanics of this is you come up with a number the entire liability for the year and you simply divided by four that's it divided by four and pay it on the dates that we discussed earlier now let's go back for a second how does the owners draw affect the tax liability well the answer is it doesn't that's the point i'm trying to make tax liability on single member and multi-member llcs are solely made on the profit of the business there is a little tiny uh nuance which is uh what if you distribute yourself more money than what you have in capital as i mentioned earlier that might be when you take out a loan and you use that loan to pay yourself right so you take out debt to pay yourself but most of the time if you're paying yourself from the profits your capital is being increased by those profits so you will not have an issue with this calculation now how does my capital or equity into my llc affect my tax liability so the answer is none again repeating this as long as you don't take non-recourse debt to pay yourself that's a loan that you don't have to pay back then you're not going to have any issues with this as long as you don't take out debt to pay yourself you should be okay with your equity or capital accounts now what about loans to owners can you give a loan to an llc owner sure a single member llc can lend the owner whatever they want whenever they want for the purposes of taxes a loan to an owner is the same thing as capital or distribution so just think of it as all the same thing it doesn't matter if you call it alone or call it a draw at the end of the day for single member llcs it means the exact same thing nothing is affected by that situation now let's switch over to multi-member llc's llcs have more than one member or partner and they didn't elect to be taxed as a corporation and they're filing a form 1065. same situation as a single member llc owners can pay themselves owner's draw whenever they want whatever they want llc doesn't need to withhold tax on those payments the payments themselves are not taxable the profits of the llc are taxable and the partners individually have to make the estimated tax payments individually based on their own tax situations so nothing changes from single member to multi-member llc however the limitation of capital it's per owner so you may have one owner that put in a lot more capital in in the llc than the other one and as i started taking money out it's possible that one owner is still taking away their own money first and another one is taking draws and it's possible that one might have a different situation than the other but how is it in reality how is it different it all sounded like the same well the only difference is this little nuance we talked about the capital account being account for individually and different but in us in a multi-member llc you can actually assign a taxable business profit percentage or allocation to a different member regardless of what is the actual ownership in the business so for example i could be 50 50 owner with my best friend of an llc but we can have a agreement that i'm going to take a hundred percent of the taxability of the income of the business so my partner or my friend that owns llc as well owns half the business but takes none of the taxable income again regardless of how much capital or we have or how much distributions or draws we take out the limitation that people can only take as much as they put in or as much as their capital is applies regardless so if i'm the one paying all the tax for the businesses profits i can probably take more distributions that than the other partner without entering that situation where i'm out of capital again this gets a little bit wonky this is more of a math calculation something that um tax accountants have to deal with all you need to know is if you are paying your tax because the income is being allocated to you you're probably going to be okay with taking those distributions without any specific tax consequences now there's a special rule with multi-member llcs which i love that it exists which is you can treat some of the draws as a guaranteed payment and that changes the dynamic quite a bit and it's a really useful tool what the heck is a guarantee payment so a guarantee payment is when you take an owner's draw but you actually take it as a deduction to the llc you reduce the taxable income of the llc by that guarantee payment this is in lieu of payroll or compensation so i'll give you an example my friend and i both owned the business 50 each we agreed that my friend not me will draw 5 000 a month because that person's working actively in the business i'm only an investor in the business um i might be passive i might be active but i'm not drawing a guaranteed payment i'm not drawing an amount before we calculate profits so when we do that the payment that the other llc partner gets gets reduced from the taxable income calculation of the partnership and then the net of that is what gets split 50 50 so we paid tax on that net profit of the partnership however even though i only pay half half of the net after the 60 000 my partner is going to pay the net the their half of the net of the business income that already reduced the guarantee payment but they're going to add the guarantee payment on top of that because you essentially reduce from the allocated amounts that each of us have to pay i know it just gets really hairy this is just a tool a guarantee payment is a tool so you can pay a partner before you count profits basically it's in lieu of payroll this is for compensation this is when a partner it's it's it's agreed to do a particular job or takes a particular responsibility that other partners don't so that's what guarantee payments are used for that's the the tool that we use guarantee payments for okay so that's a really important piece of it now what happens in multi-member llcs what about loans to partners or members can you do that same exact thing as a single member llc llcs can lend members or partners any amounts for tax purposes is treated just like an owner's draw is treated just like capital or equity it makes no difference it does not affect the taxability of it other than reducing the owner's capital account now what about a silent partner people ask me all this time what about my silent partner what's that what's a silent partner so if a person is not listed as a member or owner of the llc or corporation whatever it is they will have zero tax liability on the profits of the business right now if you're paying money if you're actually paying that silent partner that is legally that legally doesn't own the business it's just their help or whatever they're doing um any payment that silent partner gets will be taxable to the asylum partner and it will be treated either as interest so let's say they lent you money and you're paying them that's interest on the money or the it gets paid as non-employee compensation which you as an llc have to give them a 1099 and they will pay taxes on that so a silent partner basically is just a person that will get paid from your llc for whatever circumstance it is and if they get paid and when they get paid that's when they pay tax now the nice thing about this is that payment you reduce it from your income because paying a contractor you know or a non imp compensation to a non employee or an interest expense that's all deductible for the business so finally when the llc owners pay tax they pay a net of those payments so again silent partner really doesn't mean anything it just means they don't own uh the business now there's something else called an uninvolved partner which is an owner or a partner of the llc that's there to just put capital or to give advice or they're just not in the business from an operations perspective but they're in the business legally how does it work for them so if you have a multi-member llc and one of the partners or members are non-operating they're typically called a non-managing member they can certainly receive received draws and draws are not subject to self-employment tax and they're not subject to income tax but that partner will pay tax on their um allocated profits again through this k1 the only difference is that they are not paying self-employment tax because they're not earning that income they're just i mean they're earning it from a payment perspective but they're not working for it so that would be passive income so being an uninvolved owner or a non-uh managing member or non-operating partner of an llc allows you to get the income from the llc but pay passive income that means you don't pay self-employment tax that's interesting um an llc always needs to have at least one managing member because who's running it right so you can have multiple non-operating partners or non-managing members but you can have at least one and the irs does look at this pretty tightly because it does circumvent self-employment tax so you have to make sure you well you document well the circumstances okay what about foreign partners this gets a little bit tricky so what if you have an llc with foreign partners well if there's a foreign partner of the llc there will be a requirement from the llc to make an annual withholding of the maximum tax rate so 37 of the profits of the business allocated to the foreign partner needs to be withheld the llc is responsible for withholding it and reporting it to the irs into that partner's itin or uh in individual tax identification number so a foreign partner of an llc needs to take out an 18 an individual tax identification number because i don't have a social security number because the llc is going to put money in their account and then each of the individual foreign partners have to file a return at the end of the year and they're going to pay a tax it might not be 37 it might be something lower and get a refund at the end so with a foreign partner it gets a little bit um hairier okay now an unprofitable llc an llc that has no business profits does not need to withhold anything with um or for the foreign partner so you don't have to worry about that as long as they don't take out any draws then the foreign partner you don't have to report anything specifically it's just when that profit is reported that you have to make that withholding now how do you calculate estimated taxes as a member of a multi-member llc same as a single member llc just at each of the partners or each of the members level okay let's switch gears and talk about llc's to be taxed as a s-corporation these are llcs that elect to be taxed as as corporations this is probably the best choice for most llcs now same concept as a multi-member llc you have one or more owners uh you're gonna file an 1120s tax return instead of a 1065 if it's got more than one owners ownership percentage always equals taxable business income percent allocated with a multi-member llc that did not elect to be an s corporation you can have owners that have a certain percentage ownership of the business and a different percentage allocated for income and tax purposes in an s corporation you don't get that flexibility if someone owns 27 of a llc elected as an s corporation they will pay based on the allocated 27 of the profits of the business so there's not a lot of flexibility there it's all pretty straightforward based on ownership now the beauty of s-corporations is shareholders do not pay self-employment tax on the business income this is a 15.3 we talked about earlier when you have an s corporation you don't pay that so it's magically 15.3 of your tax taxes go away so it's wonderful it's really amazing there's one little tiny nuance which is shareholders of s corporations have to pay themselves quote reasonable compensation and reasonable compensation gets paid through payroll and payroll pays self-employment tax in one way shape or form and also withholds tax so what the heck is reasonable compensation this is a term that the irs put together in order to force s-corporations which have this huge benefit of not paying self-employment tax on the profits to have to pay themselves something through payroll now the actual amount or percentage is not set by the irs this is going to be based on the business owner owner's determination and judgment and advice from their accountant and there's a whole bunch of factors the factors i think about when giving my clients advice about how much it's reasonable compensation keep in mind business owners of s-corporations are going to want to minimize this they want reasonable compensation to be as slow as possible to reduce the amount of taxes that are paid through payroll to re to not pay self-employ i mean self-employment tax but not pay social security and america as much so um the game here is that most small business owners that have s corporations want to pay themselves as little reasonable compensation and as much draw as possible to minimize that self-employment tax so the factors i look at is one what's the profitability of the business if the business has a million dollars in profit and the s corp owner does all the work and he or she claims that their salary is only 30 000 a year well that's a pretty wide gap i mean really i mean uh 30 000 a year performance gives you a million dollars in profits so we make sure that there's no ridiculous gap between the compensation and the profits of the business the next one is how much distributions is the owner taking out from the business if the business owner is taking out a lot of distributions above and beyond the profits i start thinking about moving those draws to payroll to prevent that capital account that we've been talking about all the time to go down so we use payroll to prevent that and again we'll pay a little bit more tax when it's through payroll but you know we keep it kosher per se to try to stay within the reasonable compensation guidelines now you also take a look at the average salary of someone doing the job that the owner is doing so the owner is more more of a sales person or more of a ceo is more of a um of a of a data entry person is more of a you know of a sort of um field worker so you take a look at what the role of that business owner is in that in that business and based on how much it would cost to replace that person uh that owner with an outside person or how much the owner will get paid otherwise by working for someone else we take a look at that number and we put it as part of the out of the four factors and lastly what is the business operating cash cycle so you can you can have a business that's very um profitable but not very cash rich where the profits are sitting in accounts receivable because a big customer hasn't paid you yet well the irs understands that you're gonna forego a little bit of uh payroll for the purposes of helping your business's cash flow so there's no one size fits all we look at all four of those factors and that's how we determine or recommend what reasonable compensation to pay now how are owners of s corporations paid payroll we talked about this right via payroll you can use a major company like adp paychecks gusto quickbooks online payroll to calculate the paychecks and process the taxes i recommend using a payroll processor doing it manually it's a pain in the butt don't recommend doing it manually but you can file forms 940 941 w2 and whatever the state payroll requirements are for your state in a quarterly and in an annual basis you can go online you can go on the irs website you can search form w-2 941-940 all the instructions are there it is possible to do it manually it's just a pain in the butt so we recommend spend a little bit of money and use a major payroll company to just kind of take over that responsibility tax accountants do that too but most tax accountants end up also outsourcing it to one of the big ones because it's just a lot of um it's a lot of busy work and it's very difficult to make money as an accountant from for charging payroll so the big uh payroll companies figure out how to make it really easy for small business owners now after reasonable compensation is met that means via payroll you pay yourself a reasonable amount any payments or additional money you pay yourself as an llc owner that's an s corporation or or an s corporation itself any subsequent payments to that are just owner draws are just shareholder distributions and they don't get self-employment tax they don't get taxed all the rules that we talked about of honor draws apply now what about loans to shareholders that gets a little bit trickier with s-corporations they can lend the business owner as much cash as possible in the short term as long as the business owner pays it back usually within the year that's what short term means but if they the llc or the s corporation pays the shareholder or gives the shareholder a loan and it's a long term generally we're going to accrue interest so we're going to calculate what the market rate of that money is calculate interest the s corporation or the llc elected as an s corporation has to report the interest income even if they haven't received it they have to accrue it and then and then if they don't do that the irs might change the classification from loan to distribution and you can run the risk of your capital accounts being negative and having a different um tax effect now what are the pros and cons of doing payroll again most people want to avoid it but what are the pros and cons so the pros is is the portion of the payroll that the portion that you pay yourself beyond payroll or not in payroll will not pay self-employment tax so you're only going to pay self-employment tax on the payroll portion also payroll is a really simple mechanism that allows you to pay taxes along the way so allows you as the loc owner as a s-corporation owner to start putting money or talking money away through a simple mechanism or withholding the tax and paying it to the government some of the cons is that it's more administrative expense right if you have an s corporation or an llc converted to an s corporation you have to run payroll pay a payroll service withhold tax throughout the year whereas with a single member llc or multi-member llc you don't have to do any of that and you have to pay the payroll cost you just have to make the estimated taxes the way we spoke about now the last entity type here is an llc that elected to be taxed as a c corporation and this one's quite different most c corporation owners will still pay themselves a reasonable compensation and follow the s-corporation rules of reasonable compensation but it is not required so even though most people follow it it's not required so you don't have to pay yourself payroll as an owner of an llc converted to a c corporation or a c corporation why is that because if you buy stock in the stock market from a c corporation and you're a shareholder you don't have to take payroll they will never give you payroll they will only give you a dividend and that's what you call when you take cash out of a c corporation that is not a payroll so owner's draw or distributions in the c corporation world is actually called a dividend and that does have a tax implication dividends from a c corporation that you own are actually taxed at a long term capital rate it's actually a preferred rate now there is a double taxation effect of c corporations basically with a single member llc a multi-member llc or an s corporation you don't have this double taxation issue with a c corporation you potentially do because the c corporation will pay tax in their own profits plus the the dividends that are being paid to these c corporation owners will pay a dividend tax in the owner's personal tax return okay so the constant of a c corporation paying tax and the owners paying attacks on the dividends is often referred to as double taxation now let's talk about those dividend tax rates they can be either zero 15 or 20 and it depends on how much money you make so if you look at the 2022 tax bracket or i'll put again a link to all the updated tax brackets in the description below you can you can get the most updated one and see based on whether you're married a single ahead of household depending on your income where you fall into for example if you see that zero option there and basically if you make less than forty one thousand dollars in 2022 as a single person and all the income you had was dividends you will pay zero tax that's what that means right because you can still pay a tax on your regular job on your um on your s corporation on your on your single member llc on your business you can still pay tax through other mechanisms but the dividend portion uh might be at a preferred rate like 0 15 or 20 20 is a maximum that you pay on that now there's a little extra tax you pay when you make when you're a high earner where which is like an extra three percent of tax on your dividends but we're not gonna discuss that that's a little bit more complex so it could potentially be almost 24 tax on the dividends actually okay so as i mentioned earlier if you have an llc converted to a c corp and you pay yourself dividend um you can uh you have the option to withhold some tax and that withholding gets paid and gets reported in a form 1099 div you don't have to do it most people don't do it but if you do want to withhold some tax so through that dividend you are withholding tax you're allowed to do that with a dividend for a c corporation now based on what i told you why would anyone choose to be taxed as a c corporation it sounds like a really bad idea well think about it there could be multiple reasons if you own a public company or you have a public company or your company is going to go public you might want to raise capital 99 of companies in the stock market are c corporations it's the easiest mechanically speaking to raise capital with because the owners of those corporations only pay that preferred dividend tax rate now even though the corporation pays tax most investors and corporations never really even see how much tax corporations pay the only thing they see is when i get my dividend how much tax will i pay so this being the best vehicle with the lowest preferred tax rate for investors this is the preferred choice see corporations when you want to raise capital now keep in mind that c corporations only pay 21 corporate tax rate so if you have a taxpayer that's in a very very low income bracket and they're paying let's say zero on the dividend uh tax potentially uh they're only going to be paying 21 on the corporate profits now you have to open up a spreadsheet and calculate how much income will they pay on my other um how much tax i'll pay my other income plus the corporation add them together and figure things out but there are situations where some low um income payers actually do benefit net from a c corporation as a from a tax overall tax payment perspective now what happens to foreign shareholders on a c corporation well if a corporation pays a dividend to a foreign shareholder they need to withhold 30 so the multi-member llc with a foreign shareholder is a 37 percent withholding where a c corporation foreign dividend payment it's a 30 um withholding so it's a little bit different they're still withholding because they're foreign right now i didn't put a slide on this but what about uh foreign shareholders in an s corporation that's not a thing s corporations are only for u.s based people so you can only have foreign shareholders in a single-member llc multi-member llc or a c-corp s-corp will always be us-based people now let's talk about multi-entity issues what if you have multiple entities and some of these entities are owned or set up to be owned by each other so that's what we call structured ownership so can a c corporation be the owner of an llc yes it can and the llc whether it's a single member or a multi-member passes through the allocated income and ultimately the owner of that llc which is a c corporation pays the tax so just think about just think about ignoring what happens at the llc level and is the ultimate c corporation they want to pay the tax now can an other can an another llc be the owner of a c corporation yes it can the corporation will pay the dividend we'll pay the income tax and then when the dividend is paid is paid through the llc and if the llc is a single member llc or a multi-member llc will pass it through the owner or owners and the owner owners will ultimately pay that dividend so it just passes through there's nothing nothing weird happens can an llc own another llc well the answer is yes and the tax rules applies to the ultimate owner of the llc in the change they got 10 llc's that own each other but at the end one of the llc's is ultimately going to be owned by an individual person so when that happens that ultimate owner is the one that pays the tax all the rules are the same can an llc own an s-corp no s-corps can only be owned by individuals or trust and as i mentioned earlier us no s-corporations can only be owned by individuals or trusts and as i mentioned earlier only us-based can an s-corporation own an llc yes it can and the tax rules apply ultimately to the owners of the s corporation so you have an s corporation with multiple owners that owns an llc it could be single member multi-member just remember allocating based on you know who the member is ultimately the one that pays the tax is the owner of the s corporation can a c corporation own another c corporation yes it can and you're going to have multiple layers of double taxation so it's probably the worst idea ever to have a c corporation own another c corporation i'm sure there are some legal reasons why many structures are like that but typically as a small business owner that's not a structure that you look for anyway so what's my recommendation well number one if you watch the whole video thank you that's uh my first recommendation is to watch the video watch it again if you need to um i will have in the description a pdf version of this presentation that's also updated so as there's any changes in the tax law of any of the circumstances change i will update that document so whenever you watch this video regardless of how far in the future you watch this video you're going to download the latest version of that pdf ebook let's call it that of this presentation and my second layer of recommendation is you take what you read on this video you cross-reference it you google you do your own research go to the websites and see what jives what makes sense to you and then once you have both the contents of this video and your own research ready go see a tax professional go see a cpa go see an enroll agent especially if there's tax questions and say look this is my situation this is the income that i have from other sources this is the income that my spouse makes this is where i am in my life this is what i'm projecting my business to do this year next year in five years based on that let's apply it and then what would you recommend i do should i remain a single member llc bring another owner be a multi-member llc convert to an ease a c corp and s corp depending on everybody's situation trust me that money will be well invested go talk to a cpa tell them i sent you anyway i hope you like this video if you have if you like this video subscribe to the channel go in the description to see all the resources make sure you hit like and add any questions in the comments i'll do my best and i'm sure our community here on youtube will also do their best to help you thank you and i'll see you on the next one

Channel: Hector Garcia CPA

Views: 37,707

Keywords: quickbooks online, how to pay yourself as a business owner, single member llc, limited liability company, how to pay yourself llc, pay yourself, pay myself inside of an lllc, llc vs corporation, single member llc vs multi member llc

Id: yBckhuovlRo

Length: 50min 46sec (3046 seconds)

Published: Wed Jan 26 2022