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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 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
Thanks for your comment Jay Slocomb, have a nice day.
- Theodore Fruth, Staff Member
welcome back to taxes made simple i'm your host carlton dennis and in today's video we are going to go over how to pay yourself as an llc in 2022 most new business owners want to figure out how to take home the most amount of money possible while also limiting their tax liability and minimizing any tax obligation that they might have however a lot of people start businesses without knowing the best way to pay themselves guys if you've recently created an llc or if you're thinking about creating one i want you to know that this is very important on how you pay yourself if you want to know how to pay yourself look no further than this video this video is for you so let's dive in now before we get into the best way to pay yourself as an llc let's do a quick refresh of exactly what an llc is an llc stands for a limited liability company an llc owner or owners of the business cannot be sued or held liable personally for the debts or liabilities of the company llcs are designed to protect business owners from losing all of their personal assets in the event that something goes wrong with the company for example if the company is sued or if it is forced to repay a large outstanding debt the liability protection of the llc provides helps to make things safe enough for many people to feel comfortable starting a business without limited liability protection a lot of people would be too afraid to start a business because they would be too afraid of being held personally responsible for all of the businesses debts and liabilities there are single member llc's which are owned by one person and there are multi-member llc's which are owned by multiple people the option that is right for you depends on whether or not you have partners if you don't have partners then most likely you're going to start off setting up a single member llc and it's probably the better option for you and if you do have partners the multi-member llc is most likely the better option the best way to pay yourself as an llc though the best way for single members to pay themselves as an llc is what's called an owner's draw so let's talk about it hey guys i'd like to take a moment to let you guys know who i use to set up my llcs and the only company i refer people to use to set up llcs this company is called better legal better legal is the fastest and most affordable way for business owners to set up their new llc or corporation better legal files in every single state and you can have your business completely set up in as little as two business days going through the process has been as easy as drinking water because you can have an llc set up in less than 10 minutes and actually understand what you're setting up on their platform they'll help you attain your articles of incorporation if you decide to set up a c corp or an s corp they'll help you obtain your articles of formation if you decide to set up an llc and most importantly they'll help you get your ein number so you can take it to your bank and start getting yourself paid if you need to get your llc set up at an affordable price look no further than better legal their link is below so you can get started now back to this video owners draws also commonly referred to as owner's distributions you might have heard me say that before an owner's draw is an amount of money that you take from the business and give to yourself in order to set up your owner's draw from your llc the first thing that you have to do is set up your business bank account business owner you'll need your ein number the employer identification number in order to set up your business bank account the government will give you your ein when you set up your llc you can think of this number almost as a social security number for your business when you go to set up your business bank account the bank will require you to provide this number after you give them your ein you'll be able to set up the business bank account associated with that number now once it's set up you'll be able to start using the business bank account to store money earned by the business when you are ready to pay yourself with your owner's draw you can simply send the money from your business bank account to your checking account owner's draws are used for llc owners in lieu of a salary as long as you keep your business an llc and do not change it to an s corp or c corp you will be able to use the owner's draw to pay yourself distributions from your business now when you are taking your owner's draw you do not have to pay yourself in even intervals you can pay yourself whatever you want and however often you want and whenever you want however you should be careful not to pay yourself too much because you want to keep enough cash in the business bank account to pay your taxes and to be able to cover expenses so for example your company made two hundred thousand dollars in one year but if you had eighty thousand dollars in expenses you should not pay yourself more than a hundred and twenty thousand dollars right over the course of the year because otherwise you might struggle to pay for those expenses it would be smarter to pay yourself probably around maybe a hundred thousand and leave a little cushion because you do not know what surprise expenses might pop up in addition to your usual expenses llc payments and taxes the nice thing about llcs is that they are designed to combine the best benefits of corporations and sole proprietors into one so even though llcs have limited liability just like corporations this means that for tax purposes the owner and the business are one in the same so just like with the sole proprietor your llc profits are considered personal income meaning you don't get taxed twice on that income however even though you don't get taxed twice as a single member llc owner you will be subject to self-employment tax which is 15.3 welcome to my youtube channel 12.4 goes to social security 2.9 goes to medicare many people consider this tax to be quite large it is burdensome and it's crazy and i talk about how to avoid it every day on this channel if you want to avoid self-employment tax you can switch your llc to an escort however if you do this you'll be required to pay yourself a reasonable salary you can still take distributions on top of your reasonable salary but we recommend at least in my office that your salary is at least 30 of your annual business income many people who start out as single member llc's eventually switch over into s corporations to avoid paying self-employment tax that is just what ends up happening as you grow if you switch to an s-corp then you only pay 15.3 percent on what you paid yourself the payroll and you also still qualify for the 20 percent qualified business income deduction the qbi which allows small business owners this additional 20 on all net business income changes for 2022 to be aware of generally speaking is that the tax rules for llc's will remain the same in 2022 however there are a few general tax changes that you should be aware of for example the standard deduction will rise the standard deduction will rise from married coupl
Thanks Jackson your participation is very much appreciated
- Theodore Fruth
About the author
I've studied library at Texas A&M University at Galveston in Galveston and I am an expert in petrophysics. I usually feel angry. My previous job was postmasters and mail superintendents I held this position for 4 years, I love talking about worldbuilding and credit card churning. Huge fan of Sam Darnold I practice rhythmic and collect casino chips.
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