A single-member limited liability company (LLC) is a type of business structure that’s an alternative to a sole proprietorship. This blog post explains why you might want to consider creating a single-member LLC if you’re self-employed, and it explains two of the biggest questions people have about this:
- How do I pay myself?
- How am I taxed?
If you’d like to watch a video on this topic, go to the bottom of this post. Otherwise, read on.
If you want a business entity that offers personal liability protection, you can form a single-member LLC, which is an LLC with one owner. (LLC owners are also known as “members.”)
You get to have “LLC” in your business name, and as the name states, it protects your personal assets and limits your liability against lawsuits and creditors. But those benefits come with a downside: LLCs have to pay to register with the state, are subject to governing laws, and may have to pay annual registration fees.
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What’s the difference between paying myself and taking business profits?
When it comes to single-member LLCs in particular, these two terms mean the same thing. When you pay yourself as the owner of your business, you transfer a portion of your business profits to your personal bank account so you can pay for your personal expenses.
And because the Internal Revenue Service (IRS) doesn’t consider single-member LLCs as separate legal entities from their owners, your business finances and personal finances are one and the same under the law. From the IRS’s point of view, any profits your business makes are considered part of your personal income for tax purposes—even if all the money does is sit in your business bank account.
A single-member LLC taking business profits may or may not choose to use that money to cover the owner’s personal expenses. However, the act of paying yourself implies just that.
How do I pay myself as a single-member LLC owner?
Do I pay myself a salary or take an owner’s draw?
Some LLC owners aren’t required to pay themselves a salary or wages. Single-member LLCs, for example, typically pay themselves by taking money out of the LLC’s profits as needed. This is called an owner’s draw. You can simply write yourself a check or transfer money from your LLC’s business bank account to your personal bank account. Easy as that!
However, if you elect to have your LLC taxed as an S corporation (S corp) or a C corporation (C corp), you must pay yourself a salary as an employee of your business, especially if you’re involved in your venture’s day-to-day operations. Going this route can help you lower your personal income tax liability and give you a predictable, consistent monthly income.
Do I need to run payroll for myself as a single-member LLC owner?
This depends on how your LLC is taxed. If you don’t make a special tax election for your business, the IRS will treat your LLC as a sole proprietorship for tax purposes. You won’t be required to run payroll for any owner’s draws you make because your personal and business finances are treated as one.
Can I pay myself differently if my LLC is taxed as an S corp or a C corp?
If you prefer, you can choose for your LLC to be taxed as a corporation, either an S corporation or a C corporation. If so, you may be required to pay yourself a reasonable salary with payroll taxes taken out.
You also have the option to take distributions from your business’s earnings, either in addition to or instead of a salary. This is an attractive option for many business owners since these payments aren’t subject to employment or payroll taxes. Keep in mind that the IRS’s “reasonable compensation” guidelines also apply to owner distributions.
How am I taxed as the owner of a single-member LLC?
The IRS treats single-member LLCs as sole proprietorships by default, which means your LLC will be seen as a “disregarded entity” for tax purposes. Instead of the LLC paying income tax, its profits and losses are passed on to you, the small business owner, making disregarded entities also pass-through entities.
In other words, you may consider it a bookkeeping tax benefit that you don’t need to file a separate tax return for the LLC as the sole proprietor, since you’ll report all of your LLC income on your personal tax return. Your state, however, may have different tax filing requirements for LLCs, so make sure to check your state’s rules.
How much should I set aside for taxes when I pay myself?
Aim to set aside about 25% to 35% of your company’s profits for federal and state taxes.
Depending on your business income, taking an S corporation tax election can reduce how much you pay in self-employment taxes (i.e., Medicare and Social Security taxes), but it can also result in additional business tax payments and more paperwork at tax time. So, be sure to talk through the pros and cons with your certified public accountant (CPA) or tax professional first.
