Today we’re going to talk about one of the most common questions I get from people that are forming LLCs, how to pay yourself with an LLC. We’re going to focus on something really important to a lot of you, and that is how to get paid with your online business.
Today’s blog is going to focus primarily on how to pay yourself if you’re running a single-member LLC. If you’re a multi-member LLC, it’s going to be a little bit different, and that’s the subject of another blog post. But today we’re going to talk about a single-member LLC, and we’re going to talk about the two different ways that you can pay yourself as a single-member LLC, and that’s as a disregarded entity on the one hand, or an S corporation, as far as taxing status on the other. So the first method to pay yourself is if you’re just a blanket garden variety, vanilla single-member LLC, you’ve not elected any type of S corporation status. And the way to do that is you are going to write yourself a check.
The second method is to pay yourself what is called a reasonable salary. And when you do that, you’re going to withhold payroll taxes, FICA, state, and federal, withholding, all those types of things will be done, because you’re going to pay yourself a salary, and you’re going to receive a W2 at the end of the year, just like you would if you were an employee for any other business. So you do this when you’ve made an S corporation for your business. And that’s because if you’ve elected to be taxed as an S corporation, you have a legal requirement to pay yourself that reasonable salary we just talked about.
You’re probably wondering what is a reasonable salary? That’s a great question. I’m glad you asked. So a reasonable salary is something that … it’s a term of art that was created by the IRS, and it’s going to vary depending on the type of business you’re in and your role in that business. So generally speaking, what a reasonable salary is, it’s the amount of money that you would pay yourself if instead of being the owner of the business you were actually the technician doing the work in the business. Does that make sense? So for example, if you are a law firm, it’s the amount of money that I would pay myself if I were a lawyer working in a similarly sized law firm. If you are, let’s say an agency owner, it’s the amount of money that you would pay that graphic designer to do the work of designing graphics for your clients or customers, so when you elect to be taxed as an S corporation, it does get slightly more complicated, and a little bit more confusing when it comes to the payroll aspects of your business.
I’m going to venture to guess, and this isn’t that much of a guess, I don’t think this is that farfetched, that if you elect to be taxed as an S corporation, in all likelihood you’re going to need to go ahead and hire a bookkeeper, or an accountant, or a third party agency of some sort, service, who can help you run payroll for your business.
If you elect to be taxed as an S corporation under no circumstances, unless you have an accounting background, and you know how to do these things, should you try to do payroll on your own? You will, will, 100%, I guarantee mess this up. And not only that, for like 50 bucks a month, you can hire a service that’s going to do all this for you. They’re going to file all the forms. They’re going to file your quarterly taxes. They’re going to deposit the money in your account. They’re going to do all these things for you.
For the vast majority of you out there who operate as an LLC, you’re going to be what’s called a disregarded entity, which means that you have not yet elected S corporation status, or C corporation status, or any taxation status for that matter. For those of you that fall into this situation, you basically can pay yourself whatever you want, whenever you want, however you want from your business bank account to your personal bank account. That means you can write a check. That means that you can do an electronic transfer. If your bank allows a business to personal transfers, some do, some don’t, or you can just withdraw cash and deposit in your account. The only requirement that you need to be concerned about is to make sure your LLC is properly capitalized, so that you don’t run the risk of violating any terms for purposes of piercing the corporate veil.
Let’s touch on briefly how much you actually are going to pay yourself as the owner operator of your single member LLC. For a single member LLC, each month when you get revenue in, you’re going to pick a couple of days, let’s say the 10th and the 25th, and you’re going to make target allocations. So that might be anywhere from 30%, to 50%, to 60% of your revenue is going to go to your owner’s pay. And you’re going to take that amount, that percentage from your revenue, and you’re going to transfer that into an account for owner’s pay. The remainder, whatever’s left, is going to be divided up between profit, taxes, and expenses for the business, and you’re going to have separate allocations for each of those, and you’re going to transfer the money into a separate account for those categories as well.
So you’re going to have four accounts, owner’s pay, expenses, taxes, profit, and that’s how you’re going to pay yourself. Thanks so much for reading this blog post.