How to Pay Yourself With an LLC

if you recently started a business and formed an llc you're probably asking yourself how do you pay yourself well in this video i'm going to cover that question how do you pay yourself when you form an llc in addition though i'm also going to answer some other questions such as what exactly did you do when you form this llc you know what's the treatment from a legal and tax perspective as well as what taxes do you pay when you're an llc what taxes you could be paying if you elect to have your llc taxed as an s corporation if you're not familiar with that don't worry i'm going to explain it it's a strategy that can save you thousands of dollars in taxes and if you choose to elect s corp status for your llc how do you pay yourself in that situation so stick around we've got a bunch to cover alright guys so if it's your first time watching my name is navi mirage i'm a cpa who helps entrepreneurs save thousands of dollars in taxes even if you have a cpa and i do so by creating content on social media so please do subscribe if you learn something while watching this video with that said let's jump into the actual you know talking points that i mentioned a moment ago so i created a visual for you to help explain this a little bit further right i think that will help a lot of you understand this so let's first talk about the second question i brought up actually which was before i tell you how to pay yourself i want you to understand what you did when you formed this llc so let's take a look so you see here i've got on my screen something that says legal entity types and across the bottom it says tax classifications what i mean by this is when you start your business and you don't form an llc well that means you're a sole proprietorship okay so up at the top here i'm saying that your legal entity type is a sole proprietorship and the asterisk here says a sole proprietorship is not a separate legal entity from its owner so what that means is if someone wanted to sue your business and come after the assets of your business they meet they excuse me they may be able to get the assets uh related to you personally so your own home or your own car or what have you this sole proprietorship entity type is also a tax classification it's the way you're taxed okay so assault proprietorship is a legal entity type and it's also a tax classification now that's what this little symbol here says it says hey this is me an individual i'm just going out i didn't form an llc i'm starting my business and i'm going to choose to operate this way okay and this box here represents your business you and your business are the same that's why i have the individual person here in the box of the business okay now what happens when you form that single member llc so you went to a website and filled out some forms to form an entity or you did it on your own when you did so what happened is you separated your business from you as an individual so what i mean from a legal perspective is that your business is now separate from yourself so if someone wants to sue your business they may not be able to get after the assets of you that you own as an individual okay now i say the word may because you need to be doing the proper things to make sure you get that treatment that you think you're getting when you form an llc so i'm not a business attorney i suggest that you speak with one but some high level things are making sure you use your llc and all your marketing material making sure you have separate bank accounts making sure you have articles of organization handy an operating agreement is something that you should have as well those are just some examples okay again i'm not an attorney go seek the guidance of an attorney and they'll probably tell you the same thing so you form this llc and now you think okay i've separated the sort of legal responsibility or the liability rather from your business and yourself that's great but what did you do from a tax perspective well you didn't do anything actually a single member llc uh by default is taxed as a sole proprietorship it's taxed the exact same way when you were a sole proprietor and you didn't form the llc all right so a sole proprietor uh or a single member llc from a legal entity type is taxed as a sole proprietor as a tax classification okay a lot of people don't understand that so what taxes do you pay um as a sole proprietor we're going to discuss that here in a second another thing you can do and i'm sorry i jumped a little bit ahead there is elect to have your llc taxed as an s-corporation okay a distinction here is that the s-corporation is not a legal entity type you don't see me having a box up here explaining or describing the s corporation as a legal entity type it's a tax classification if you form an llc you can file a form it's called form 2553 with the irs and elect to have your llc taxed as an s corporation one thing to point out here is you'll notice there's no arrow that goes from the sole proprietorship legal entity type to the escort because you can't do that you can only be taxed as a sole proprietorship when you form or start doing business as a sole proprietor however if you're a single member llc you have the option to elect s corp status okay and don't worry if you don't understand this i'll explain why anyone would want to be an s corp here in a second now the reason why you maybe clicked on this video is to find out how to you pay yourself when you're a sole proprietor or a single member llc taxed as a sole proprietor so now you might understand why i awarded the question this way it's because if you're a sole proprietor and you don't have an llc this is how you pay yourself or if you formed an llc and you didn't make the s corp election this is also how you pay yourself a lot of people overthink this it's very simple let me show you so if you uh i would hope that if you formed a business that you opened a separate business account at your bank okay and let's say for one month you had revenue or sales of ten thousand dollars and let's say in order to get that revenue you also incurred expenses in this example i'm saying three thousand dollars of expenses is what you incurred okay um what that means is really you had maybe advertising expenses maybe you uh drove a lot to earn this revenue and so you had a business mileage deduction uh cell phone expenses all these are your different marketing expenses for example these are your different expenses and so you are left with a profit of seven thousand dollars in your business so if this is all the activity that took place in your business account then you would have seven thousand dollars of cash sitting there in the business checking account and you might be wondering well how do i pay myself as the sole proprietor of that business well it's super simple a lot of you guys are over analyzing this all you do is transfer the money from your business account to your personal account so over here i've got a picture of a cell phone or you can write yourself a check it doesn't really matter just transfer the money from business to personal so let's say your personal account had a balance of a thousand dollars you just transferred the seven grand over from business to personal now your new balance in your personal account is eight thousand dollars that's all there is to it guys you don't need to complicate it that's all you need to do now i wanted to create this slide here and just go over this i know there's a lot of text on here but these are some mistakes or some questions i get about how do i pay myself so that transfer that i just talked about a moment ago it's called a draw okay it's not a salary and it's not a paycheck okay so don't refer to it that way that would be sort of technically wrong you the sole proprietor are not an employee of the business okay so don't treat yourself as an employee and you shouldn't be calling yourself an employee that said if you do hire employees you'll need to pay them properly and pay payroll taxes and file payroll reports so for example if you had an employee you're obligated to pay social security and medicare taxes for that employee as well as you may have to pay state unemployment insurance for that employee okay that's you as the business owner are responsible for those items all right regardless if you transfer the money out of the business or not you'll still pay taxes on all of the profit okay and i'm gonna explain what i mean by that in a second but the point that i'm trying to make here is if you leave the money in your business account you're still going to get taxed on it all right so you can leave it there if you need to invest that money in other like business equipment or other items related to your business but whether you leave it there or transfer it to yourself uh personally you're gonna get taxed on the profit of your business all right that's a great transition over to this next slide i know you see a lot of things here on this slide but bear with me i'm gonna explain it all to you so here on this slide i'm comparing what taxes you pay as a sole proprietor what taxes you could be paying as an s corporation okay so in this example again i want you to understand the language here in this example over here on the left you're a sole proprietor or a single member llc that's using the default you know tax treatment so you're being taxed as a sole proprietorship right and you went out and for the year you had 125 000 of revenue in your business you also had twenty five thousand dollars of expenses right that gives us a nice round number of a hundred thousand dollars in profit that you earned so you might be asking what taxes do you pay if you earn a hundred grand of profit uh in a sole proprietorship type business well you pay a couple different types of tax you pay self-employment tax on this hundred thousand dollars and you're going to pay federal income tax and if you even if you live in a state that charges uh state income tax you're going to pay state income tax so let's look at some um estimations about how much you would pay so 100 grand times your self-employment tax rate that's 15.3 percent if you don't know what self-employment tax is that's okay i don't expect you to that's social security and medicare taxes all right so you have to pay this as a business owner um 15.3 so that's 15 300 in self-employment tax alone all right then what happens is you take this hundred grand and you're gonna you know file your federal income tax return at the end of the year and that income is gonna flow through the different tax brackets that we have here in the us that's called a progressive tax system but when it flows through all of that you know if you're single and you earn this amount of money you're probably going to pay around 15 maybe 12 in taxes by the time you get your standard deduction and all that i know it's a little bit uh deeper dive of a discussion so just trust me when i say that you're going to pay around 12 grand in tax you may pay a little bit more or may i'll be a little bit less and you're going to pay state taxes as well right so the hundred thousand dollars depending on what state you're in might be around four grand or so if you're in a state like colorado uh it might be like four or four and a half percent if you're gonna say like california or new york it's gonna be much higher right so i'm just using four percent as an example here so again 100 grand times the four percent is uh about four thousand dollars so the main thing that i want to sort of transition to now is you know what could be some tax benefits you could get if you elect to have your llc taxed as an s-corporation so i want to sort of describe what i'm saying there and that is you would form an llc file paperwork with the irs to have your llc tax as an s-corp and you can treat yourself as an s corporation and get this favorable tax treatment that i'm about to talk about so what taxes does an s corporation pay so an s corporation if you're deploying the strategy with your business is what happens on the hundred thousand dollars of profit is you're gonna split that hundred thousand dollars into two separate buckets and i'm gonna call that a salary here you may hear that referred to as a reasonable compensation um and i'm gonna split it into what the tax form is called a k1 but this is sort of like a distribution of the profits from your business so the 40 000 that you take as a salary in this example and the 60 000 that you take as a distribution still equals 100 grand right so that's the hundred thousand dollars the reason why people do this is because the if they take a salary on the 40 grand well now only the salary is subject to the 15.3 percent in self-employment taxes all right so if we do the math forty thousand times about fifteen percent is six thousand one hundred and twenty dollars on the distribution the uh you know the transferring of taking the business profits and just transferring it to your personal account the distribution portion that you're not running through payroll is the sixty thousand well you don't have to pay self-employment tax on that so it's zero dollars is how much taxes you pay there as it relates to social security and medicare taxes um what does an s corporation pay in terms of federal and state income tax well it's the exact same thing when you are an s corp this salary flows into your personal tax return this distribution flows into your personal tax return and that's where you pay the same taxes or very very similar taxes that you would pay um as a sole proprietor so it's twelve thousand and four thousand respectively so uh what's the difference here how much are you saving well in this example there's a tax savings of almost nine thousand dollars right and how we got there is we're taking the fifteen thousand three hundred and self-employment tax that you were going to pay comparing it to the nine thousand sorry the six thousand dollars or so that you're paying here uh with the s corporation so if you're a little bit more technical or a little bit more business savvy you know that there's some other deductions that i'm not counting here but this is about the tax savings let's say it's eight grand that you're saving in taxes which is great now what happens when you're an s corp in terms of how do you pay yourself right you clicked on this video and if you're still with me you were watching to find out how you pay yourself as an llc but now you might be wondering well i don't want to be in an llc i want to be taxed as an s corporation well it's a little bit more complex and i didn't really want to miss anything so forgive me for all the text on the screen i'm going to read to you a little bit but for the salary portion of the s-corporation money you are now an employee of her business and you know i made that distinction earlier when you're a sole prop i'm like hey you're not an employee now that you're going to be an s corp you are an employee of your business you need to determine what a reasonable compensation is for you in your business in the prior slide i use the example of about 40 so 40 000 salary right um some other things you'll have to do is you'll need to register with your state for an unemployment tax account number because you will have to pay unemployment taxes even if you never file for unemployment taxes as the business owner um you still have to pay these unemployment taxes so you need to register with your state for an account number that they'll give you and that's where you pay the unemployment taxes into same thing uh you're probably going to pay income tax on that salary so you're going to register with your state if your state has an income tax for a tax withholding account i know this is getting a little bit complex just stick with me another responsibility that you'll have is to file payroll reports on either a monthly or quarterly basis depending on how many employees you have in your business besides yourself and you're gonna have to pay payroll taxes on the amount that you pay yourself as a salary so that's the social security and medicare and state unemployment i know that's a lot guys i know it's a lot to digest the reason why i wanted to point out all these different things is because i don't think you should be doing that on your own if you're a business owner if you're a business owner you should be trying to earn that next dollar of revenue or do your advertising or marketing and focus on getting as much revenue dollars as you can you're probably going to outsource this um payroll piece to either your accountant or cpa or you can hire a payroll company to do it all for you that's what i recommend as opposed to you know trying to fiddle around with all this paperwork on your own the k1 portion which is the distribution that you took um that's very simple you don't have to worry about all this payroll tax for that part uh for the k1 portion you're just going to transfer money from your business checking to your personal just as you did when you were a sole proprietor when i was uh went over that slide right you just use your cell phone or uh your online banking and transfer the money from business to personal so um that's how you know you pay yourself in an llc that's how the llc is taxed why you may want to be an s corp how the s corp is taxed and how to pay yourself when you are an s corp something i want to mention real quick is my website i'm going to transition there for a second if you learned something in this video once again please do subscribe about 90 of the people who watch my videos are not subscribers believe it or not and um you can visit my website where i'm going to teach you a little bit more what i mean by that is i'm actually in the process of developing a course it is in production so in the meantime you can sign up for the waitlist uh in this course you're going to learn a bunch of different tax strategies how to implement the s-corp strategy properly how to hire your minor children in the business how to you know put up to 50 000 even more actually in a retirement account if you wish those are all things that you're going to learn not just how to do it and how that can save you thousands of dollars in taxes but how to actually implement those strategies in accounting software um further down you'll see that hey if you watch this video and you want to form an llc or want to be an s corporation you can do so with these different companies you've got ink authority ink file zen business these are different companies that i researched and i was amazed to see that with some of these companies if you click on the right buttons you don't have to form or sorry you don't have to pay any fees they'll just do it all for you you might have to pay them to apply for an ein number for you for ink authority for example but they'll form the llc for free they'll do the s corp election for free they will even be your registered agent for free for the first year if you want to you know if you learn something but you still have questions you want to schedule a q a session with me i've made myself available for 30 minute and 60 minutes sessions so you can just use this time to ask me a question if you wish further down there's videos other videos that i produce you can go there and learn about those different topics all right with that being said in a moment here another video is going to pop up soon that i highly recommend that you watch uh if you got value out of this video chances are you're going to receive information in that video and get a lot of value in it as well in the meantime i hope you learned something in this video and with that said i'll see you on the other side

Channel: Navi Maraj, CPA

Views: 10,127

Keywords: LLC, Sole Proprietor, Sole Proprietorship, Corporation, S Corp, S Corporation, C Corporation, Tax Difference, Single Member LLC, Multi Member LLC, What is the difference between an LLC and S Corp, What is a LLC, What is a Limited Liability Company, What is a S Corp, What is an S Corp, LLC vs Corp, Sole Prop vs LLC, Start a business, How is a LLC tax, Legal difference between LLC and Corporation, How to pay youself with LLC

Id: 6myv4m6m3ag

Length: 19min 29sec (1169 seconds)

Published: Fri Jul 16 2021