Originally Posted by MrLemon
Yeah, that is what I imagine you have setup. I won't come onto a forum and give any sort of professional advice, but if I see someone like snofarmer start advising someone without any knowledge of topic I will call him out on it.
You called me out on nothing.
Your advice was full of assumptions and bad advice in my opinion.
You are the one that was called out by a guy with bad grammar.
There are two ways to pay yourself as a limited liability company member manager, as LLC owners involved in running the business are called. You can withdraw money from the company accounts, or you can give yourself a salary. Yet which method of payment you can use depends on the federal tax classification you choose. The choices are not easily interchangeable.
Withdraw funds from the company account to your personal account to pay yourself if your LLC files its taxes under the default classifications from the Internal Revenue Service. The IRS by default considers a single-member LLC as a “disregarded entity” for tax purposes and treats it as a sole proprietorship. The IRS treats multi-member LLCs as a partnerships under default rules. Under the default classifications, an LLC member cannot receive a salary.
Record each personal withdrawal as an “owner’s withdrawal.” If you use a computer accounting program, create a separate account item for owner’s withdrawals. These withdrawals are not considered a company expense. For a single-member LLC, you pay self-employment tax on the company’s entire profit. The amount of owner's withdrawals does not raise or lower your tax. For a multi-member LLC, you pay self-employment tax on your share of the profits.
Elect to change your LLC’s tax classification before paying yourself a salary. File IRS Form 2553, Election by a Small Business Corporation, to be classified as an S Corporation, or Form 8832, Entity Classification Election, to be classified as a C Corporation. The election does not change the actual legal structure of the LLC, but it does require member managers to be paid a regular wage.
Select a “reasonable wage” for yourself. The IRS requires that a member manager’s wage meets industry standards for the type of business you’re in. The LLC pays all payroll taxes and withholdings for employees, including yourself. Report your wage on your personal tax return as earned income.
Report any share of the LLC's profit you receive in addition to your salary as "passive income" on your personal tax return. The IRS considers this unearned income that is not subject to employment taxes, though you will have to pay income tax on it.
How to Pay Myself From My LLC | Small Business - Chron.com
One half of your self-employment tax is taken as an adjustment on the front of your 1040. As a self-employed person, you can also claim 100% of your health insurance premiums as an adjustment on the 1040. You are also eligible to set up a solo 401(k) or other retirement account that will allow you to contribute higher amounts than most folks can (and take that as an adjustment to income, too).
"members, can not receive a W-2, as they are not employees that are paid salaries via W-2s. However, you can definitely pay salaries to each LLC owner/member. This "salary" is typically termed a guaranteed salary. It is paid gross to each member. Each member is responsible for paying the income taxes and payroll taxes (employer and employee social security/medicare) through quarterly estimated tax payments. "
Brooks M.Partner, Hughes Pittman & Gupton LLP
Rule #1 -- Don't write checks for your personal expenses out of your business account.
This is a very quick way to get into trouble with the IRS and have your corporate veil pierced. All checks written on your business checking account should be for business expenses. All charges on your business credit card should be for business expenses as well.
How To Get Paid -- Single Member LLCs
If you have a single member LLC, the mechanics of paying yourself are simple. Fortunately, you won't need to create a payroll system just for yourself with the whole alphabet-soup of government agencies taking little (and not so little) chunks out of your paycheck. Instead, you simply write a check from your business account to your personal account.
The process simply is this:
- Receive check from customer.
- Deposit check in business checking account.
- Pay business expenses from business checking account.
- Write check from business account to your personal account.
- Spend your money!
Follow these steps and you ensure that you're not commingling business and personal funds. This is important because a big reason for forming a limited liability company is to limit your personal exposure to business debts. To mix business and personal funds defeats this purpose and exposes your personal assets to business creditors.
The cost is minimal. Basically, it's the cost of having a separate business checking account. If you carry a big enough balance in your business account, you can probably avoid bank fees altogether. Another way to reduce bank fees is to use the same bank for your business as your personal banking.
Salary Tax Issues for the LLC
Small business owners have a variety of withdrawal methods
available to them when attempting to minimize the amount of vulnerable assets within the business. Payment of salary
is the most common method, subject to certain tax issues.
Generally, the earnings of the limited liability company (LLC)
will be subject to the self-employment tax
, irrespective of whether or how these earnings are distributed.
Therefore, there is no self-employment tax advantage to distributing earnings
as opposed to paying salary
. In other words, there is no disadvantage
, as far as self-employment taxes are concerned, to paying salary as opposed to distributing earnings. However, because the state LLC statutes
usually impose the same constructive fraud
test as the Uniform Fraudulent Transfers Act (UFTA)
, the paying of salary in the LLC also does not confer any advantage.
In contrast, the state corporation statutes
impose more stringent balance sheet tests
than what is imposed by the UFTA. Thus, in the case of the corporation
, the payment of salary confers a benefit, because salary is not paid on account of an ownership interest, and thus helps you to avoid the state corporation statutes' more stringent balance sheet tests.
Nevertheless, similar to the corporation, an LLC's payment of salary, as opposed to distribution of earnings, does qualify the distribution under the state and federal asset exemption
provisions. Thus, especially because there are no self-employment tax disadvantages, overall, payment of salary is the better alternative in the LLC.
Finally, an effort should be made to structure the LLC's payments of salary as "guaranteed payments."
In addition, payments for loans and leases
are another advantageous way to withdraw funds from the business.
Electing to be treated as an S-Corp (or C-Corp) by the IRS simply requires you to file a form with the IRS when you register your LLC (or before the next tax year). S-Corp status allows the LLC to pay its members actual salaries, with the appropriate withholding paid through the business. The profits of the business are then distributed according to the Operating Agreement, and are treated as surplus income for tax purposes. The important factor here is to be sure you set a reasonable salary for your position in the business. If you don't, the IRS may reclassify some or all of your profit distribution as ordinary income and go after you for the self-employment tax on that amount.
Now for the 401K.
The Solo 401k
Plan, also known as the Individual 401k Plan
, is perfect for any business formed as an S Corporation. As long as the S Corporation meets the following requirements, it is eligible to adopt a Solo 401k
(i) The business must include the presence of self employment activity.
(ii) The business must not have any full-time employees.
The main advantage of using a Solo 401k Plan is that the owner of the S Corporation can contribute the following amounts annually for 2011:
1. 100% of W-2 earnings up to the maximum of $16,500 or $22,000 if age 50 or older. The employee contribution election must be made prior to December 31.
2. 25 percent of the compensation paid. Accordingly, a profit sharing contribution up to 25% of W-2 earnings can be contributed into a Solo 401k. In other words, in the case of company, the employer profit sharing contribution must be based on the compensation paid by company not the overall profits earned by the company.
One of more noteworthy advantages of the Solo 401k Plan is that it allows the Plan participant to make traditional as well as nontraditional investments, such as real estate or precious metals, tax-free!. Just like a Self Directed IRA
Seeing as MrLemon
has absolutely no idea how my llc or yours is set up his assumptions may not apply to you or me.
A good non assuming CPA is a good idea. Why take advice from one that assumes. I'd fire mine if she made assumptions or talked down to any perspective clients.