How To Pay Yourself As An LLC

welcome back to taxes made simple i'm your host carlton dennis and today we're going to go over how to pay yourself as a single member llc if you're someone who has recently started a business then you probably are thinking about setting up a single member llc or a multi-member llc if you're getting into partnership with someone but in today's video we're going to discuss exactly how you should be paying yourself as a single member llc to not get yourself in trouble and to make sure that you're leveraging the tax law the way that it's meant to be leveraged let's dive in [Music] now the first thing we have to understand about the single member llc is the characteristics of the single member llc if you're a single member llc owner that means you have established a disregarded entity a disregarded entity is no different than a sole proprietor business which pretty much means is that you decided to start a business but the only thing now that you've done is that you've separated the liability from yourself which means that you're no longer associated with just your social security number you now have this ein number that you get to utilize the ein number is taken to a bank where you can open up your business banking account you can have a checking account a savings account you can even establish yourself a credit card even if the bank will allow it now in order to understand how to pay yourself as a single member llc i'm gonna break it down very simple for you on a white piece of paper on my ipad let's jump right in so what i have here is how to pay yourself as a single member llc what i'm going to do is i'm going to go ahead and draw a line directly on the center of the page i'm going to put our single member llc on the left hand side i'm going to go ahead and put ourselves us we're going to be over here on the right hand side okay so we completely separated ourselves from our business our business is sitting over here we're sitting on the right-hand side which means the liability is no longer associated with us if something happens and someone wants to sue us inside of our business they can sue us but they're going to sue only to the extent of what we have now that's sitting inside of this single member llc now let's just say that we started in online candle business and let's say our candle business made a hundred thousand dollars in the year of 2021. well if our candle business has accepted this money through our single member llc we need to make sure that we've accepted it the right way first now if you have established yourself as a single member llc the government has given you a very important number it's called an ein number and i view an ein number almost like a social security number for your business because it is it's truly how your business is identified it's the number that you present to your bank when you want to open up a bank account and it's the number that you need when you decide that you want to grow your business credit or apply for a loan so this number is going to be extremely important to you the ein number however needs to be set up which means you need to go take it to a bank and you need to establish your business bank account now once the business bank account is established and we have our candle business we can accept this hundred thousand dollars through our single member llc but now the next question becomes how do we pay ourselves if we were to move money over to ourselves in our personal bank account without doing anything formal or running payroll to any type of company as adp or carla dennison associates then we have taken what's called a distribution what a distribution means is that we've simply just distributed money to ourselves let's say that we decided to distribute twenty thousand dollars to ourselves does this mean that our business receives a twenty thousand dollar deduction over here it does not and part of the reason why our business doesn't receive a deduction when we're a single member llc writing ourselves a check or just moving money over or selling ourselves or even then mowing ourselves the reason why we as business owners do not get a deduction for paying ourselves as a single member llcs is because we aren't processing payroll with a payroll company and we aren't taxed as an s corporation when you're a single member llc you are just what's called a shareholder and as a shareholder you can take income to yourself and you can also pay your employees however when you pay your employees you receive a deduction for this but when you pay yourself you receive no deduction and this is what hurts a lot of my single member llc clients because they'll get into their business and start growing their finances but then they get to a place where they want to start paying themselves but they're not getting a deduction every single time they pay themselves so then they come to their tax guy and say hey is there anything i could have done to reduce my tax bill and then they find out later that they should have switched over to an escort in order to receive this deduction for paying themselves on the tax return so let's talk a little bit more about how an llc can switch over to an s corp to pay ourselves out of our s corporation if we're an llc in order for us to switch over to an s corp we're gonna need to do two things we're gonna need to complete a 25 53 form in an 88 32 form these two forms right here are how the llc transitions over into an s corporation but one of the things that we have to understand about the escort is the s corp has a lot of rules and one of the rules of the s escort is that you have to give yourself reasonable compensation reasonable comp which is a salary not to mention you need to make sure that you're filing your tax returns on time which is march 15th instead of april 15th so when we get over into this s corporation what does it mean to take reasonable compensation what does it mean to have a salary well you think about a job that you've ever had before in your life just think about any type of job you've had whether it was working for 7-11 whether it was being a bellhop whether it was being a lyft driver an uber driver you were given a wage based on what you were doing and it was deemed reasonable based on what you were doing but if you're a business owner and you're making money you may have an extravagant business you may be a youtube star you may be someone who's behind a camera and just selling themselves online your business could be a number of different things so you have to try to determine a reasonable compensation for yourself based on the income you're making but not just the income that you're grossing you want to base reasonable compensation based on net income after all of your expenses so if you're someone who's making really good money but you end up having tons of expenses to offset that really good money you're never really in a position where you're taking a huge reasonable compensation so let's talk about it let's say i made three hundred thousand dollars in my business but then after all expenses and i had two hundred dollars in expenses i was left with a hundred thousand dollars in taxable income well even though i grossed three hundred thousand dollars this was my gross business income i am not going to be able to pay myself over a hundred thousand dollars because my taxable income is only a hundred thousand dollars and being that my business's net income is a hundred thousand dollars this is the net of the business now that i understand the net of the business me the employee the s corp owner the employee of the s corp i need to take a reasonable compensation from that business that i own and a reasonable compensation is not all of the money that the business made it's a portion of the money that the business made when you think about companies like nike google microsoft they're not dumping all of the money that they have in their bank accounts out to their employees in reasonable compensation they're giving set salaries to set employees based on what they think is reasonable just like you're gonna give yourself inside of your ass corporation a set salary based on what you feel is reasonable now i understand that you're not the irs and you're not a tax accountant so this is where you need to partner with one to figure out what's reasonable based on your net income in my office we have a rule of thumb we have a rule of thumb that it never makes sense to take less than 30 percent of net income from your business so if we had a hundred thousand dollars taxable income then at the very least we're going to take a 30 000 payroll deduction that's going to end up flowing over to our personal tax returns where we are okay however in the business i have now finally received this deduction that i've been looking for and this is where some of the tax savings are really coming in for business owners who are making more than 20 to 30 000 a year when you're starting to push into that 50 60 100 000 200 000 and plus this is really powerful for you because taking payroll deductions it helps you reduce self-employment tax 15.3 you have to pay into and now you're only paying into social security and medicare taxes based on what you paid yourself so we paid ourselves 30 000 we're going to pay social security and medicare tax which is 7.65 and we're going to not pay 15.3 on that 30 000 or this hundred thousand dollars in taxable income now this other 70k that's business income in my escort this is going to flow over to my personal tax returns because s-corps are flow through entities just like an llc all income flows over to the shareholder of the company but when it flows over it's going to get hit with a qbi deduction what qbi deduction stands for is qualified business income deduction and what it means is that if you have an escort or an llc a flow through entity you receive a 20 deduction on any business income you didn't pay yourself so if i've already paid myself thirty thousand dollars then i have seventy thousand left in my business seventy thousand times a twenty percent deduction that's a fourteen thousand dollar deduction i just received by having this s corporation set up correctly now what flows over to my personal tax returns is 56 000 okay so over here on this side of the table i have fifty six thousand dollars that's going to be subject to federal and state taxes and then i have thirty thousand dollars that's subject to fica fed and state taxes in this scenario though having 30 000 subject to 7.65 fica federal and state tax with 56 000 subject to federal and state taxes i am going to pay far less than if i were to have total net income of a hundred thousand but also being subject to self-employment tax because as a single member llc you pay 15.3 in self-employment tax on net income but net income results in you not getting a deduction for when you place yourself on payroll because you never place yourself on payroll if you're in an llc you can start to see how being in an llc can start to hurt you if you don't know when to switch to the s corporation guys i am going to hammer this down over and over and over again in multiple multiple videos because every single person understands things differently and there's tons of different ways i can break this down so that you can understand it so you can build wealth strategically now i want to go over an example of what it would look like if you were to have that hundred thousand dollars as a single member llc without switching over to an escort well hundred thousand dollars right out the back i know i'm subject to 15.3 percent because this is self-employment tax self-employment tax is fica and fica is social security and medicare okay now fifteen point three percent of a hundred thousand dollars guys we can do we can do simple math that's fifteen thousand three hundred dollars what's left over is eighty four thousand seven hundred dollars okay this is my adjusted gross income this now after i've already paid out fifteen thousand three hundred dollars yes i get a deduction for half of it but this now is what i'm subject to so if i'm single this is going to put me into the 24 tax bracket if i'm single i'm gonna have maybe about another eighteen thousand dollars come out in federal tax and then if i'm in the state of california state of california is about eight and a half percent so i'm probably going to have about another six to seven thousand dollars come out let's just say seven thousand okay so i have my fifteen thousand three hundred dollars in self-employment tax that i already had to fork up eighteen thousand dollars in federal taxes and then state of california is charging me another 7 000. guys in this scenario i'm paying upwards to 40 000 in taxes just because i didn't switch my single member llc over into an s corporation not to mention in this scenario this person who made that hundred thousand dollars got a thirty thousand dollar deduction because he understood reasonable compensation he gave himself a salary he only paid seven point six five percent instead of fifteen point three percent in social security and medicare which is fica and then he also received this whole qvi deduction and received a 20 qualified business deduction on what was left over net income now if you guys can look at this example it's very easy to see 40 000 versus probably far less up here i'll do the math for you right now so let's break this down if we have 56 000 plus 30 000 that's going to put us at about eighty six thousand dollars it's going to put us into the 24 tax bracket so if i times that by 24 it's gonna give me about twenty thousand six hundred and forty dollars okay now i do need to make sure that i'm factoring in state taxes welcome in the state of california it's about eight and a half percent that's about another seven thousand five hundred and sixty eight dollars so in total i pay about 28 000 being in this s corporation versus about 40 000 operating as a single member llc just because of this thing called self employment tax now paying yourself as an s corp is very unique because when you become an s corp owner you still get to take distributions which means you can still pull money out of your bank account and deposit it into your normal checking account you only have to run payroll one time in the year as an escort owner which means if you don't want to have payroll taxes being taken out every month and you don't want to have a pay stub and a paycheck being provided to you every single month and if you don't want to pay a payroll company every single month then you can budget your finances and do a one-time payroll at the end of the year once you know what your true net income is so rather than having to send money off to the government without you truly knowing if that's how much you're going to owe you can wait budget your finances implement a little bit of tax planning so that way you get to a place of having less taxes and a better financial position now guys if you like this video feel free to like comment subscribe so i can make other videos like this i am going to be going over llc's s4 c corporations rental real estate on this page so if you don't mind feel free to subscribe so i can continue to make more content like this for you i look forward to seeing you on the next [Music] video

Channel: Karlton Dennis

Views: 471,115

Rating: 4.9737978 out of 5

Keywords: How to pay yourself as an LLC, llc, tax strategist, tax, taxes, new business owner llc write offs, taxplanning, payyourself, businessowner, businesstax, scorp, buildingwealth, howtobuildwealth, payroll, LLC to S-Corp, lLC benefits, How LLC owners pay themselves, LLC payroll, pay myself inside of an LLLC, pay employees with an LLC, tax avoidance, tax alchemist, tax alchemy

Id: XHTkQj4QTWE

Length: 17min 4sec (1024 seconds)

Published: Tue May 11 2021