To pay yourself within an LLC, various options are available. The two most common options are to treat yourself as an employee with wages, or to treat yourself as an LLC member and receive distribution from the profits.
#1 | Wages
Paying yourself wages as an employee of the LLC allows you to receive regular compensation. However, to have the option of paying yourself wages or a salary from your single-member LLC or other LLC, you must be actively working in the business. You must have an actual role with real responsibilities as an LLC owner.
If there are multiple owners and all the LLC members participate equally in the operation of the business, one cannot receive a salary where the others do not. However, if the LLC members do not participate equally, you may be able to pay yourself a salary. For example, if you are the only member that has a management role, you can pay yourself a salary without setting up salaries for the other participating LLC members.
Employee wages are considered operating expenses for the LLC and will be deducted from the LLC’s profits. Because the Internal Revenue Service (IRS) only allows reasonable wages as a deduction, any salary paid to yourself must be within industry norms. Additionally, bonuses may be issued to LLC members who are employees, including yourself. Like wages, any bonuses must be reasonable in comparison to the salary being paid.
To determine the amount of payroll withholding from each paycheck you receive, you will be required to file IRS Form W-4. The LLC will pay you as a W-2 employee and will withhold income and employment taxes from your paycheck. You will pay income tax on your wages earned.
#2 | Distributions from Profits
Another option for paying yourself in an LLC is to receive distributions of profits from the LLC each year. Each member owns a percentage of the LLC, called his or her capital account. Year-end profit distributions are made based on that percentage.
If you are the only member of the LLC, you will pay income tax on your distributions and you will file Schedule C to report the profits and losses of the LLC with your personal tax return. If there is more than one member, the IRS will treat the LLC as a partnership and each member will report their share of the profit and pay income tax on that amount. The LLC will file IRS Form 1065 to report how profits are divided among the members.
# 3 | Other Options
Notably, receiving a salary and receiving year-end distributions are not mutually exclusive. Thus, even if you get a paycheck, you’re still a member of the LLC and entitled to your year-end distribution.
Of course, you do not have to pay yourself anything from the LLC. Rather, you may leave the profits in the LLC. However, you still will need to pay income tax on the profit earned, since the profits from your LLC pass through to your personal tax return.