- Hi everyone, I'm attorney Aiden Durham with 180 Law Co. in Denver,
Colorado, and welcome back to All Up In Yo' Business. (casual uplifting music) In this episode of All Up In Yo' Business, I'm gonna go into detail
about how you pay yourself in a single member LLC. I've talked about this topic before in some previous episodes, but in this one I'm gonna go over some of the basics of how you pay yourself, as well as some tips and info to help you make sure
you're setting aside enough to save for taxes, and also just enough to continue operating your business. But before we get into it,
please be sure to like, subscribe and share, and
check the description for some links to some
free downloadable guides and checklists. I've also got a written guide available for you guys to download for free that goes into more detail
about how to pay yourself and gives more examples and description about how you go about doin' it. All right, so how do you pay yourself in a single member LLC? I'm gonna get the first easy part of this question out of the way, which is the how. The how of paying yourself is for the most part completely up to you. Unless your LLC's operating agreement is specific on one of these, then the dates, the
amounts and the methods that you use to pay yourself
are at your discretion. You can write yourself
a check to pay yourself, you can transfer money
from your business account to your personal account. You can take that money for yourself in whatever method or
mode works best for you. It really doesn't matter. But you do wanna make
sure that your bank jives with however you plan to pay yourself. I mean, if your bank charges you to order or write checks and you plan on writing yourself a
check to pay yourself, then maybe that's not the best method in conjunction with the
bank that you're working at. Or if it's easier for you to transfer the money from one account to another, but your bank doesn't allow
you to do that easily, then maybe you wanna
find a different bank. I was recently introduced to Novo. It's a completely online bank, and you can apply and
open your account online in just a few minutes, which I love. You only need 50 bucks
to open the account, and Novo lets you connect your account to other bank accounts so you can really easily
transfer that money. They also offer really cool integrations like with Zapier and Plaid
if you wanna get fancy, so Novo is a really great option if you're wanting an
easy way to pay yourself, because with the Novo
app, you can just log on and in seconds, you can
have money transferred from your business account to your personal account pretty much with any other bank as
long as they connect. The best part though is
it's completely free. Novo doesn't charge any kind
of monthly account fees, they don't have any monthly
minimum requirements. No ACH or wire transfer
fees, it's completely free. So if you're a new entrepreneur, or if you're looking
for a really accessible, easy-to-use banking option,
then I encourage you to check out Novo. And you can use the affiliate link in the description to open an account, and you'll get a 25-dollar credit directly into your new account if
you use that affiliate link. All right, so the how part of
how you pay yourself was easy. You pay yourself however you want. But now, let's talk about what goes into figuring out how
much to pay yourself. So there are two things that we need to consider before we start figuring out how much to pay ourselves. The first is how the LLC is taxed. In this episode, I'm gonna focus on LLCs that haven't made any other kind of tax election and are just
taxed as sole proprietors. So this means you haven't made an S Corp or a C Corp tax election, you
are a single member LLC taxed as a sole proprietorship. The next video I do is going to talk about how to pay yourself in an S Corp. So if you're curious about that, keep an eye out for the next video. The second thing, regardless
of how your LLC is taxed, is going to be the LLC's
operating agreement. If the operating agreement
gives restrictions or rules or specifications as to when a member takes payment, when you pay yourself, the
amounts that you pay yourself, or anything of that nature, then you need to follow your operating
agreement to a tee. It's pretty rare, particularly with single
member LLC operating agreements that there are those restrictions. Typically, a single member
LLC operating agreement is going to leave those decisions up to the discretion of the member. So, if your LLC's operating agreement is silent on it or if you don't have an operating agreement, then
it kind of defaults back to your state's laws, which
generally will require either a unanimous or a majority consent with regard to distribution. So since you're the one single member, you are the majority and
the unanimous consent. So, unless your operating
agreement gives specifications, then really you only need your own consent to determine when and
how much to pay yourself. When you pay yourself from
your single member LLC, you are taking a distribution
of your LLC's profits. Obviously, the LLC's profits need to be used for more than
just funding your lifestyle and paying you, those
profits need to be used to pay tax for the business and to pay the operating expenses for the business, and whatever else goes into your business, that
profit, those funds need to be allocated to those things too. So when you're determining how much of your profits should
be allocated to you, you also wanna keep in mind
allocating money to taxes, allocating some to your
operating expenses and overhead. Hopefully allocating some to savings, and then of course allocating
some to paying yourself. I'll tell you what I like
to do the way that I do it. What I like to do is I will add up all of my profits over a given period. I do this on a weekly basis, just 'cause that's the
way I like to do it. But that part's completely up to you. If you wanna do this weekly or biweekly, monthly, quarterly, whatever it is, add up all of your income
and determine your profits for that last period. Then, allocate those funds between saving for taxes, paying operating expenses, just general business savings,
and then paying yourself. So let's start with taxes and figuring out how
much you should allocate to saving and paying off taxes. Unless you elect otherwise,
in a single member LLC, it's considered a disregarded entity, a pass-through entity, which means that all of the LLC's
income is taxed and treated as if it's personal income to you, regardless of how much or how little you actually pay yourself. So if your business
makes $150,000 in a year, you're paying taxes on that $150,000, even if all of it is still sitting in the business account
and you haven't taken a penny of it for yourself. The IRS considers that
you've taken all of it, so they tax it all as if
it's personal income to you. So with that income, you're gonna have to pay just general income tax as well as self employment tax,
since you're not an employee of your company, you're not
paying yourself a paycheck, where payroll taxes are getting taken out, the IRS isn't getting their payroll taxes, so instead they are giving
you this self employment tax so they can still get their cut. The self employment tax in total is 15.3%, and then your ordinary income tax is going to depend on where
you fall in the tax bracket. So again, let's pretend my annual income for the year is $150,000. For 2019, that puts me
in a tax bracket of 24%. So that gives us a very rough estimation of what we can expect to pay in taxes. We've got that 24% ordinary income tax, plus that 15.3% self employment tax. So adding those two up, I
can expect to pay roughly about 39% in taxes. Now, a big caveat to that, this is not a super accurate estimation, because taxes, ordinary income
tax isn't applied that way, it's a progressive tax system, so even if you're in the 24% tax bracket, that doesn't mean all of your income is taxed at 24%. And this also isn't taking into account any other
deductions or credits, so this is just a good starting point to give you an idea of how much of your profits should
be set aside for taxes. So if you take that 15.3% and add that to wherever you follow the tax bracket, you know all right, at least around this number
is what I'm gonna be taxed. So since that number isn't 100% accurate, I'm gonna lower it down
to 35% for the rest of this video just to make
the rest of my examples a little bit easier. So now we know about how much needs to be allocated to our taxes. Next, we wanna make sure
we're allocating some for our businesses' overhead
and operating expenses. You can figure this out by looking at your tax returns for the past few years or your profit and loss
statements for the past few years, or if your business is new and
you don't have previous years to refer back to, you
wanna do some budgeting and estimating to figure
out what you can expect to pay in your just general overhead and operating expenses,
and then you wanna estimate about how much you're expecting
to make over that year. But if we're using the method of looking back over previous years, that'll give us a way to get an average of how much we spent in operating expenses versus how much we made over those years. So for example, let's say I look back over the past three years and on average, my business income is $100,000. And then on average, I spend
about $15,000 every year on operating expenses and overhead. That means based off
of my previous history, I can estimate that about
15% of my businesses' income is spent on expenses and overhead. So now we know we're
allocating 35% to taxes and 15% to operating expenses. If you want to set aside a certain amount or percentage for saving
for your business, that's certainly a great idea, and you'll wanna factor that
into the allocations too. By default, I like to just
set aside 5% of my income. Sometimes I'll adjust that up or down, but just kind of a general
number that I use is 5%. So now we've got 35% for taxes,
15% for operating expenses, and 5% for savings. That leaves 45% leftover, which I can now take to pay myself. So in this example, I am gonna add up all of my profits from last week. Let's pretend last week I
had total profits of $5,000. So now that $5,000 I'm gonna allocate in those proportions
that I just determined. So 35% of that 5,000 is
going to be set aside or saved to pay for taxes. 15% of that $5,000 is gonna be set aside and used for continuing
operating expenses. I'm gonna put 5% of that
$5,000 into a savings account, and then the rest, the
remaining 45% I'm gonna take for myself or set aside at least to use to compensate myself. And then if there are any other categories that you want to include in there, you can certainly do that too. Like if you're trying to pay off a debt, you can factor in a
percentage for each period that goes towards paying off your debt, or any other goals or things that you want to make sure your funds are allocated to. And another important thing to remember is that these numbers, these allocations, these proportions can and should be fluid and adjustable. Obviously, hopefully our income is gonna go up over the years, our expenses are going to change, how much we need to pay
ourselves is going to fluctuate, so those numbers really
will need to change, and it may take a while and do some trial and error before you get those numbers to a place that really work
for your business and for you. So these numbers and
the numbers that I used in the example are not any
kind of set in stone number. They can and should be tailored often to fit your situation. Whenever and however you
choose to pay yourself, it is important that you properly record it in your LLC's books. The money that you pay
yourself as a member of the LLC, it's not an
expense to the business, it's not a deductible expense, and it's not a payroll expense. It's typically referred to
as a member distribution or a member draw, a member withdrawal. The most common term
is member distribution. And that's often how it would be recorded in your records and in
your accounting books, would be as a member distribution. Single member LLCs in particular are often examined under a microscope when they're involved in
any kind of legal action. Because there are no other members around to provide those checks and balances, it's easier for a single member to abuse or take advantage of
the liability protection of the LLC. So when push comes to
shove, it's very important that you properly record and document each and every member distribution that you take so it doesn't look like you're just using the LLC as your own personal bank account, taking money out whenever you need it. So when it comes to how you pay yourself in a single member LLC,
the key takeaways are this. Overall, your tax payments will be exactly the same regardless of how little or how
much you pay yourself. There are no rules or requirements for how you pay yourself
in a single member LLC. That part is pretty much up to you. And finally for the sake
of your personal liability, you should keep adequate
records of each distribution, as well as documents,
resolutions, spreadsheets, anything that can help
to show how you arrived at the amounts that you are
distributing to yourself. So as you can tell, a lot
needs to be considered when you are trying to determine
how much to pay yourself and how to pay yourself
in a single member LLC. It's a delicate balance, and a constant work in progress
between your personal needs and the needs of your business. Therefore, it is strongly recommended that you work with a CPA or tax advisor who can help you determine what your tax liability is and help ensure that
all of your tax payments are gonna be made on time. It's also great to bring a
bookkeeper onto your team, even if it is very part-time,
just a few hours a month. An experienced and knowledgeable
bookkeeper will add such a great deal of value to your business, and it will save you a lot
of headaches in the long run. That's all for this episode folks. Drop a comment below and
let me know what you think. And again, don't forget
to check the description for a link to download my written guide on how to pay yourself
in a single member LLC. There's a lot more
information and examples and more demos of how
you go about doing it and figuring out those allocations. Thank you all so much for watching. I'm Aiden Durham, and
I'll see you next time. (offbeat uplifting music)
