There are four main ways you can receive payments from your LLC.
1. W-2 Employee
One method to receive payment is to treat yourself as an employee. With this payment method, you would receive paychecks, just as you would as an employee of another business, using a W-2 tax form and designation. According to the IRS, you have to pay yourself a ‘reasonable compensation,’ in which they have industry set guidelines to consider.
If you pay yourself this way, you could elect to be treated as an S-Corporation for tax purposes. The advantage to the S-Corp filing is that you only pay FICA, Medicare and Social Security taxes on the salary you pay yourself, not on all business profits.
This method can incur other expenses (like a payroll processing app or services) and requires quarterly payroll filing and tax payments, which does not always serve the smaller LLC companies well.
2. Profit Distributions
Any LLC member can be paid through profit distributions or owner’s draws. This means passing business profits on to owners (you). For a single-member LLC, this payment method looks very similar to the way you would pay yourself as a freelancer. Money comes into the company, but you distribute it (owner’s draw) to your personal bank account.
If you pay yourself in this way, you will pay self-employment taxes on the total profits of your company. This method is most common for LLCs, especially for those with newly formed LLC companies or those operating under a certain profit threshold.
3. 1099 Independent Contractor
You can technically pay yourself as an independent contractor instead of an employee of your business, but this isn’t always the most advantageous method. As a 1099 contractor, payroll taxes would not be withheld from your pay and you would still be paying the self-employment tax rate. This method is typically used for special circumstances or occasional services, but not a common practice.
4. Keep the Money in your Business
The last option is not to pay yourself at all. You might do this if you want to put earnings back into your company, instead of your pocket, or if you want to build savings within the company.
You are still responsible for paying income taxes on the profits your business generates, even if you do not take a paycheck.
Not sure what is best for you? Let’s chat about your company and your options!