How To Pay Myself In My Business (LLC, Sole Prop, Corp, or S-corp)? -- And Tax Implications!

welcome back in this video i'm going over how do you pay yourself in your business how much do i pay myself how often do i pay myself are there any tax advantages to how i pay myself or if i leave money in the business we'll be breaking it down super simple in this video if you're new here my name is amanda you're watching the business finance coach where i simplify all the technicalities of business and money to help you succeed because i believe that these tools should be easy and you should feel supported by them and in this video we're going to be looking at some of my nifty cheat sheets from my courses and you can check out the description box below for free templates and courses let's jump into how you pay yourself in your business okay so paying yourself in your business actually isn't that complicated it's one of the few things that isn't that complicated but if you are a certain type of business then things can get more complicated so the first thing we need to look at is how is your business taxed for that we're going to look at my cheat sheet for legal and tax types of businesses so basically every business has two types a legal type and a tax type regardless of if you've ever done anything to set up your business you still have a category so if you did nothing to set up your business or if you were a good citizen and you went to your state and registered as a sole proprietor you're a sole proprietor so a lot of people are still proprietors and they don't even know it yet or you could have chosen to be a sole proprietor because it's the easiest type of business to have because it's not separate from you as a person you're not creating another person which is kind of what you do when you make a separate business you create a separate entity which can be responsible liable can own things so it's a big responsibility just like creating a human only not really so if you're a sole provider the business is taxed as self-employed which is a good thing because that means you don't have to file a separate business tax return which just makes things easier because a separate business tax return is a whole other tax return now if you're one of the separate businesses these are the most commonly used separate businesses llc partnership corporation or non-profit you should know if you formed one of these because you needed to file specific organizational documents legal documents with a state government to form one of these if you chose an llc you can see under tax type we have the small letters that say disregarded entity that means that the irs does not acknowledge the llc and instead they tax the business based on what it would have been without an llc and that's based on how many owners the business has in an llc owners are called members so you can see the single member llc is taxed as self-employed just like sole proprietor if you're a multi-member llc meaning two or more owners then you're taxed like a partnership now you can see the next three the irs has their own tax return partnership business irs has a partnership tax return corporate business irs has a corporation tax return non-profit there's a non-profit tax return then we have the last type of tax business which is something that can be elected by any of the other types of separate businesses it's called the s corporation so looking at these if you didn't already know you should be able to know what type of legal business you are in tax type of business so now we're going to look at my business taxes and owner pay cheat sheet and we'll talk about how you're taxed based on how your business is taxed if your sole proprietor contractor self-employed then guess what it does not matter how you pay yourself at all that means you just take money out of the bank in fact you might not even have a separate business bank account for your business it doesn't matter if you do or you don't it doesn't matter that money that you're categorizing as your pay it just doesn't affect anything you don't even need to keep track of it if you keep the business separate you can keep track of it like we would in a separate business but the category that you're calling your pay it doesn't mean anything you might be saying well what how does the irs know what i was paid then well it's based on net income from the business so what you do need to keep track of is your business income and your business expenses business income minus expenses equals net income from the business and that's considered your pay you can take it out or spend it however you want your taxed on the net income now if you're a single member llc then you are a separate business so for legal purposes you should use a separate business bank account and you will keep track of the money you put into the business and take out of the business okay those are going to be tracked under owner's equity accounts because the business in a separate business owns its own bank accounts and so every transaction needs to be reconciled and you as a member in an llc as an owner you have the value of your ownership of the business and the money you put into the business increases that value so any contributions you make which could be bank transfers when you put money into the business or money you deposit into the business it's not sales it's just money you're putting in maybe to cover bills that money is going to be a contribution to the business that you're going to keep track of under an owner's equity account and then when you take money out of the business you might categorize it as pay you might categorize it as paying yourself back for money you put in it doesn't matter those withdrawals are going to decrease your basis you can see you never use a w-2 or 1099 in a self-employed business so if you have a multi-member llc or a partnership your tax is a partnership the business is also called a pass-through which means it doesn't pay taxes it is going to file a separate business tax form because you have two or more owners and so it's going to use form 1065 which is just an informational return that reports all the income and expenses as well as other things and the owners are going to be taxed on their share of net income just like in the self-employed only now it's based on how much of the business do you own if you own fifty percent you're taxed on fifty percent of the net income just like paying yourself in a sole proprietor single member llc it doesn't matter how you pay yourself or even what you consider your pay you can withdraw money from the business and again that's going to be tracked in an owner's equity account owner's equity accounts can also be called capital accounts because it's the owner's value of the business the the value of the business is on the report called the balance sheet and i have other videos that go through the balance sheet assets equals liabilities plus owner's equity every owner has an owner contributions and an owner withdrawal account and that's where you handle the money you put in and the money you take out so there's no way to manipulate what you're taxed on based on what you pay yourself guaranteed payments is just a way to allocate some of that net income to one of the partners before then splitting the net income so you do have that tool again i go through it in more detail in this other video so i'll leave that one for you never 1099 or w2 for owners in a partnership or multi-member llc now i have another video about guaranteed payments and basis so we'll link that here but i want to explain one other example here so you can see how important it is to really talk to your partners and communicate about how and when you're going to put money in and take money out and to really be on the same page about this so for our multi-member llc example let's say the business has 500 000 in sales 300 000 in expenses and net income of 200 000. we have two owners and they each have 50 ownership of the business so they're each going to be taxed on a hundred thousand on their schedule k1 as ordinary business income their share of it now let's say that the two partners agreed that we're going to live off our other income and just leave all the money in the business to keep reinvesting in the business that's great they're still gonna pay taxes on their share of net income and that's gonna increase each of their basis by a hundred thousand now let's say partner two didn't play along with the roles and partner 2 actually took 200 000 out of the business without partner one knowing guess what they're still each taxed on a hundred thousand dollars of ordinary business income now for the partner who withdrew all the cash that's a withdrawal from the business and that's going to decrease the amount of his basis if basis goes below zero you have to pay taxes on the withdrawal otherwise withdrawals aren't taxed they just impact your basis so i hope that illustrates how important it is to be communicating and really trust the person that you go into business with but when it comes to how you pay yourself how often the amount all of that is really flexible and you can do it any way that you and the partners agree to so next is the corporation how do you pay yourself in a corporation an owner who works in a corporation has to be paid with a w-2 just like any job you've ever had the owner in a corporation has to be paid that way as well that does mean that you have to make some sort of regular payments at least monthly it should all be based on decisions you make though and define in legal documents the corporation to hold up in court does need to use a lot more legal documents and that's why i don't recommend the corporation since we have these easier options to use if you don't have the funds to plan for all this or even want to just spend the time planning for all these extra details when you don't need to in an llc sole proprietor partnership now the corporation pays taxes it pays a flat 21 tax rate right now so there is a trade-off there right you can consider the amount you pay yourself now it's more emphasized in the s corporation but you do need to be paying yourself a reasonable amount for the work that you're doing you can take money out of the business but it's considered a dividend in a corporation and it's taxed at dividend tax rates now the nonprofits don't actually pay taxes but you do pay yourself as a w-2 employee typically in a non-profit because they typically use the corporate structure it's based on each state's rules so in the s-corporation the s-corporation is a combo of self-employed partnership in the corporation so it's the s corporation you pay yourself as a w-2 employee you have to pay yourself as a w-2 employee and you need to pay yourself reasonable compensation which is based on what someone would normally be paid for the type of work you're doing and the type of job you're doing and i have a spreadsheet template that walks you through calculating reasonable compensation for yourself in my paying workers and owners course and i have another video that will be coming out going over this spreadsheet template so you would need to be paying yourself through a w-2 at minimum monthly could be weekly bi-weekly but that's just all stuff you set up in your hiring documents and and all the legal documents for your business now the other thing with the s-corp is that the business doesn't pay taxes it does file a business return called form 1120s and the business activity flows through to schedule k-1s just like in the 1065 for the partnership so even if you're a solo owner you'll still file the form 1120s if you elect to be taxed as an s corp and then you'll get a schedule k1 with the business activity that goes on your return so you do also pay income taxes on the amount that's left in the business and that's why there's a big emphasis that you pay yourself reasonable compensation in the s corporation because there is an advantage there can be an advantage with the s-corp since you don't necessarily have to pay self-employment taxes on the net income on the schedule k-1 however because of the 20 tax deduction that's been in place this is not going to be advantageous for most smaller businesses check out my other video going over the tax types comparison where it's a spreadsheet template that allows you to compare your business income and expenses under different business taxes these business taxes and that will help you with that comparison but you one thing that to take away from this is that you can't really leave money in the business for it to be you know like more tax advantageous that's not really a thing because businesses are taxed on their net income your pay is just an offshoot of that something that we keep track of and that type of thing now the s corp can be an advantage but again your income needs to be up pretty high because you're going to lose some of the advantages of the 20 deduction so and then there's a lot more rules that go into paying yourself with the w-2 but of course i have stuff on all that so do check it out that's all for how you pay yourself so i hope it's clear so to recap really quickly if you're a pass-through entity like the self-employed or the partnership which would be all of our llc's then it doesn't matter how you pay yourself your tax on the net income of the business there's no way to leave money in the business for later to make it better on taxes so you don't have to worry about any of that you keep track in single member llc's llc's partnerships you keep track of the money you put in and take out you're not taxed on that you're taxed on the net income unless what you take out exceeds your basis in the business otherwise once you go with a corporation or elect s corp status you need to pay yourself with a w-2 based on what reasonable pay is with the corporation the corporation is going to pay taxes so there is a way off there and you can check out that business tax types comparison spreadsheet to look at when the corporation or s corp might be advantageous if you have higher business net income that's all folks thanks for watching if you're new here and you like this type of thing don't forget to subscribe give this video a like to let youtube know post in the comments below i'd love to hear from you what you got out of this questions you still have share this with a friend who might need it check out some of the other videos that should be somewhere around me right now that you might like and i'll see you in the next video bye

Channel: Business Finance Coach

Views: 59,278

Keywords: how do I pay myself in business, how do I pay myself from LLC, How do I pay myself from my LLC, Can LLC owner pay himself payroll?, Should I put myself on payroll?, paying yourself a salary when self-employed, best way to pay yourself from small business, how much should I pay myself, how to pay yourself in a partnership, how to pay yourself in an s-corporation, how to pay myself in a corporation, how to pay myself in LLC

Id: 0VPfIFGJyl0

Length: 17min 11sec (1031 seconds)

Published: Sun Nov 08 2020