One question that I get asked quite often, because it’s a really good question, is how the owner of a single-member LLC is supposed to pay him/herself. There are two possible answers to this question, depending on how the LLC is taxed. Unless the LLC elects otherwise, a single-member LLC is considered a “disregarded entity” and all of the income to the LLC is treated as income to the business owner, and is all subject to self-employment tax. So basically, the owner of a single-member LLC can pay himself however and whenever he wants, keeping in mind a few important considerations: 1. Make sure you are prepared to pay taxes. Since the LLC is a disregarded entity, if the business earns $100k but you only “pay” yourself $50k, you are still going to be responsible for paying all of the taxes, including self-employment taxes, on the full $100k. (For simplicity’s sake, I am pretending there are no deductions or anything.) So you need to set aside enough money to make sure you can cover your taxes. 2. The business has to remain adequately capitalized. This means that you need to keep enough money in the business to cover all your overhead, debts, bills, salary for employees, etc. You should also leave some extra “padding” for possibly building up your business, purchasing equipment, and whatever else you may decide to do with your business. In the books, any payments to yourself should be recorded as “Member Distribution” or “Member Withdrawal.” If the LLC elects to be taxed as an S Corporation, on the other hand, you have to be paid a “reasonable” salary. Self-employment taxes will only be paid on that salary rather than on the full amount of profit the business earns. Any money that the business owner takes above that reasonable salary is considered a dividend and won’t be subject to self-employment taxes. To learn more about S Corporations, watch my earlier video What the Heck is an S Corporation at http://youtu.be/i5to7Da3wMw?list=UUNh7tqEn68tf0oOfq4NsFsg If your LLC is not taxed as an S Corp, you don’t need to put yourself on payroll, since those member distributions aren’t treated as normal payroll. If your LLC is taxed as an S Corp, then the salary you earn can be part of your payroll, and any additional dividends will be separate from that. Whether or not you elect to have your LLC taxed as an S Corp and how to handle and record the money that you pay yourself is an important conversation that should be had with your accountant, bookkeeper, & attorney. Doing it the “right” way can help minimize your tax liability and can make your life (and that of your accountant) much easier come tax time. The Law Office of Aiden H. Kramer, LLC can assist you with determining how to earn money from your single-member LLC. Contact Aiden Kramer today at (720) 854-8143 or aidenkramerlaw@gmail.com to discuss the best way to go about setting up and running your business. Learn more about The Law Office of Aiden H. Kramer, LLC by visiting http://aidenkramerlaw.com.

• published: 04 Nov 2014
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