LLC: How to Pay Yourself || how to pay yourself from your LLC, salary vs distributions, tax status

hey this is attorney Elizabeth potts-weinstein and today we're going to talk about how to pay yourself as an LLC so if you have an LLC or a limited liability company then you as the owner have different options to pay yourself based upon the tax status of your LLC so if you don't know the tax address of your LLC it's because you haven't elected anything besides the default if you have an LLC that is owned by one person it's just you then the default if you don't do anything special is that it is taxed like a sole proprietorship and then if you have an LLC that's owned by two or more people then the default is that it is taxed as a partnership how you do your payments to yourself as the owner is very similar for a sole proprietorship and a partnership it's a little bit different but tiny differences but generally speaking it's very similar the other way you could do it is to elect file special forms with the IRS to have your LLC be taxed as a S Corp or a C Corp that's going to be very different in how you pay yourself so let's first talk about the default the most ordinary way that an LLC owner is going to pay themselves so if you're a sole proprietor or a partnership what you're going to do is you're going to do distributions to yourself so it's very important that you don't just treat this LLC as an extension of yourself where you take the debit card for your LLC or the credit card for LLC and go to the grocery store to do your personal grocery store shopping if you if your LLC earns some kind of profit and you want to take that that profit out so you can you know pay your mortgage your rendering bills or buy groceries then you have to do a distribution you literally write yourself a check from the LLC to yourself personally you can do some more fancy things but I actually literally just write myself a check because it's easy to keep track of that creates that paper trail of that distribution to yourself and then you just keep track of that in the bookkeeping of URL see however you do your bookkeeping whether it is on paper an Excel spreadsheet some computerized bookkeeping system your bookkeeper actually has something whatever you just need to keep a paper trail of that distribution now what I highly recommend is that you do distributions on a regular basis and I mean you actually schedule them so once a week twice a month once a month once a quarter once a year whatever it actually doesn't matter it's what works for your business what works for you and then you adjust the amount you pay yourself so for example for me I pay myself a distribution actually today I'm recording this on the first of the month and I pay myself a distribution of the first a month I write myself a check usually it's the exact same amount every month I kind of have like a default amount but if I have a bad month I pay myself less if I have a great month I pay myself more I might pay myself double the idea is I have that discipline to have a regular schedule now there was a time a really long time ago that I had a lot more fluctuations in my business and I didn't have as much sitting in my business checking account and so because of that I needed to do distributions kind of more often so I could do them just as money came in because I needed the money personally and the business like I couldn't like uh just make random distributions to myself without knowing if I made a profit that that exact week so I made distributions every week and I would have a distributions where I made zero distribution because I didn't make any money that week and then next week I made eighty dollars profit and I would pay myself eighty dollars and that's what I mean is is that in the beginning when you're not making very much money it can be very tiny distributions or you might have time you have to do zero you know but the idea is that you do it on a regular basis the same thing happens with a partnership as a sole proprietorship the issue with the partnership is there's multiple people and you may need an agreement either in writing or at least have an agreement orally among the partners of how you're going to do distributions this is something that can be very a place where Partnerships llc's taxes a partnership can go awry is because they don't have a clear agreement on how they're going to do distributions how they're going to factor in how much people everyone gets paid and do the calculations and also when they're going to do them so you're going to need to come some sort of arrangement and I highly recommend you do it in writing it'd be great if you actually had something formal in writing but you could even just have it literally in writing in a in a document that you all have access to in an email that both sides say that they from really agree to not just one person sends the email but the other person says yes I agree to that so you don't have confusion later and end up in a big fight similar things apply to Partnerships with sole proprietorships I think with a partnership because you have to agree what the distribution is going to be it's better to do it less often so it could be monthly it could be quarterly I see a lot of partnership distributions due quarterly but you can do whatever you want as long as you can come to an arrangement about it and the reason I talk about quarterly a lot is because when you're doing distributions as a sole proprietorship when you're doing distributions to yourself as a partner in a partnership in an LLC that's taxes sole proprietorship or an LLC that's taxed as a partnership you have to remember to set aside money for taxes when you do that distribution it's just an amount it's two thousand dollars whatever no taxes are taken out but you're gonna have to pay taxes on that at the end of the year and if it's too much taxes and the IRS is going to be mad that you didn't pay estimated taxes each quarter now if you're only paying yourself eighty dollars a quarter or a hundred dollars a quarter it it probably doesn't gonna be a very good deal but if you're paying yourself a distribution that is similar to what a salary would be for someone working at a full-time job or even a part-time job you're going to need to set aside money with eat out of each of those checks that you pay yourself and then each quarter do a estimated tax payment to the IRS and maybe also to your state I recommend that you if you have a partnership you have an accountant who is doing your taxes for this reason because that can become very complicated there are some Partnerships what they do is they only do a quarterly distribution some llc's taxes a partnership that only do a quarterly distribution so the partners can pay taxes and then at the end of the year they kind of catch up with all the rest of the distribution there's no one right way to do it it depends on what your business is like and how much things are fluctuating if you have an LLC taxes a partnership there's a lot more people involved and so you're going to need to have agreements about things that have things a little more formal if you have an LLC tax as a sole proprietorship it doesn't need to be as formal in the sense as you don't have to have everything in writing with other people agreeing to it however it still needs to have a paper trail so you need to have checks that you're writing yourself Tran you know you may actually be able to just transfer the money if your banking is all the same place but you still want that paper trail and then you want to note it in your bookkeeping that you've done a distribution of profits at the amount of money really depends on how much money your business is making how much profit your business is making not just the gross revenue the actual income coming in but how much of it is profit you got to factor in the expenses that you have on a weekly and monthly basis and also the annual expenses for example in my business I have insurance I have malpractice insurance that's due once a year I think it's due in December and then I have other insurance that's due I can't remember my that payment is it's like June or something for my just general business insurance those are just one-time payments each year but I have to make sure the money is going to be there in the checking account when I have to make that payment so it's really important for you to factor that in to your calculation of how much profit you can pay yourself so you leave enough money in that account to pay the expenses that you will have in the future so as I said the second way that you can have a LLC be structured from a tax perspective is it can be a lot be elected to be taxed as score for C Corp I don't see as many people with llc's taxes at C Corp usually they would just have a C Corp if they're going to do that and so I'm not going to really address how you'd set that up you'd probably have be working with a bookkeeper if you're at that point but if you have an LLC tax as an S corp the reason you do that is for this for how you can pay yourself in more creative ways so specifically when you have an LLC tax isn't as an escort the owner who works in the business can pay themselves two ways and they actually have to pay themselves two ways the first way they pay themselves is a salary the salary for the job you do in the business so me as a lawyer for my Law Firm I pay myself a salary and all the normal you know ficos and all that stuff taxes and everything are taken out of that paycheck and you actually run payroll the other way you can pay yourself as an S corp owner is distributions just like the way I talked about before where you just write yourself a check once a month or once a quarter or once a year to bear so any other profits now you do have to set aside money for taxes there but it's different because think of it like when you're doing distributions it's like you're getting paid interest on a loan that's of money that someone owes you or it's something that where you owe income tax on it but you don't pay for all the other stuff that's taken out of a paycheck so security if I get all that stuff it's just income tax so you may say oh I want to pay all every profit out at to me as in a distribution as opposed to in a paycheck but here's the problem with them is that you're not allowed to the IRS knows that you'd want to do that one of those reform and lce taxes at S Corp is because if you have an LLC Texas silver predatorship or partnership youth pay self-employment tax on all the distributions and that self-employment tax is like the Social Securities and Ficus and all that stuff comes out of your paycheck but on an LLC tax and S Corp you only have to pay the equivalent of that all the social security stuff and everything on the salary part that you're paying yourself not on the distributions but the IRS is aware that you want to minimize the salary and so they don't let you there is a rule that you have to pay yourself a reasonable salary and of course your question to me is going to be what's a reasonable salary and the answer is going to be it has to be reasonable and I could tell you what's not reasonable because there's a bunch of IRS decisions on that of when they found things not to be reasonable but what is reasonable is very very subjective and So my answer is you need to pay yourself a salary that where you would have a good argument to the IRS if they audited you for why that's reasonable so for example you pay yourself a certain amount of money that If you hired someone else to do that part of the job they would do that or based upon the hours that you work or it needs to have some sort of basis for where you got it from so as an example of something that's not reasonable I remember reading a case about a lawyer who paid themselves a salary of ten thousand dollars a year well that's not even minimum wage okay no lawyer is gonna work a job for ten thousand dollars a year and then no person can legally have a job for ten thousand dollars full time because it's not even minimum wage so they had a terrible argument lawyers tend to do be one of the highest audited groups from the IRS because they make these ridiculous arguments like this that do not stand up now if you had a business where the business only made ten thousand dollars of profits and that's all it made and then you paid yourself that salary that would be reasonable because that's all the profits that there were right but if you had a business that made half a million dollars of profits and you paid yourself ten thousand dollar salary and the other 490 000 you paid yourself in distributions the IRS is going to audit you and you're gonna lose and pay taxes and penalties and all this stuff so you just want to have a reasonable argument for how much you're going to pay yourself a salary now how do you actually do that so what I recommend is if you have an LLC tax as an S corp you sign up for a payroll system I use Gusto because when I signed up for this stuff a couple years ago that was really the only non-traditional payroll system but there are more that you can find online I recommend you use one of those systems versus kind of the traditional payroll providers because those are really bet mint for big giant corporations and if you're just running people just for yourself or you and a couple other owners of your business it doesn't make sense to have something that fancy pants and you want something kind of more modern they'll be easier for you to do they will run the payroll for you they will handle all the tax filings for the employment tax filings it's great I love all those programs they're they're very very helpful now how do you do it how much do you pay yourself and when you can set any schedule you want that works for you I pay myself weekly because I enjoy getting paid every week and because it helps me be able to adjust so in 2020 I had weeks where I didn't pay myself at all I still ran payroll for my employee but in one pay but I didn't pay myself at all or I paid myself half or less of what I normally did because the business was having troubles so I actually like doing that on a weekly basis because it helps me adjust for if there's a big problem in the business but you don't have to do it weekly you can do it every other week twice a month once a month once a quarter I don't recommend doing it any less than once a quarter because of the thing I talked about before with estimated tax payments you want the payroll to be run so the taxes go to the IRS so they're happy there are some accountants and tax providers and bookkeepers who recommend running payroll once a year I disagree with that because I think it's risky if you run payroll once a year and you haven't been doing your quarterly employment law tax filings you're going to have problems and I think it creates potential liability when you really don't need that headache and running it once a quarter would handle all those issues because you could do the quarterly employment tax filings as they're required and it all works out I actually like getting paid a lot more often than I don't get paid once a quarter I don't get paid every week but that's a personal choice what works for you and your business there are also some tax providers and accountants what they do is a reconcile pay role so they you pay yourself over the course of the year and then they go back and try to kind of clean it up with this reconcile I think that's a risk also but you get to talk to your accountant and see if that makes sense in your particular situation now as I said for the ass Corporation LLC taxes at S corporation you also can do distributions and in the distributions you're going to do very similar what I talked about before where you write yourself a check or do some other kind of formal payment from your LLC taxes and if it's Corporation to you personally you make sure money is set aside for your quarterly estimated taxes if you need to do that and you just keep a paper trail of that in your bookkeeping system so in summary the most important things to keep in mind you need to have a regular schedule I highly recommend having a regular schedule you can adjust the amounts of money but a schedule is going to be a good discipline way for you to make sure that everything gets done correctly you need to have a paper trail of the payments themselves and both when you do the payments as well as keeping track of all the payments that you've made and if you have an S corporation if you have an LLC taxes at S corporation you need to run payroll the final thing like I mentioned multiple times is if you're doing any kind of distributions that's not a regular payroll kind of distribution where taxes are taken out you need to set aside money for taxes and you might need to do quarterly estimated tax payments talk to your tax provider or look in whatever system you use to file your taxes to do that calculation for you if you have any questions about what I talked about today about how to pay yourself as the owner of an LLC feel free to post them in the comments below and I'll try to get back to you and point you in the right direction thumbs up if you found this helpful subscribe if you'd like to watch more videos like this and you can Chuck down in the description below to learn about how to have more contact with me join the Discord join the patreon All That kind of stuff thanks a lot for watching talk to you next time bye

Channel: Elizabeth Potts Weinstein

Views: 12,924

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Id: UTwQ-THsdFM

Length: 16min 29sec (989 seconds)

Published: Tue Dec 06 2022