How do I pay myself from my LLC?

business best practices limited liability companies tax tips Dec 10, 2022
how-to-pay-myself-llc

You have created an LLC to legitimize your business, Kudos!

How do you take money out of your business and put money in?

If you have partners in your LLC, this article is not for you.  We have a separate article for paying Partners in a Partnership.  

But if you are the sole owner of your LLC, keep reading.

1. Setup your Owner's Equity accounts

First thing first, setup your Owner's Equity account in your bookkeeping software.  

The EQUITY section setup differs by entity type and is critical to setting you up for success. As such, when we do QuickBooks Online setup for clients, we include a custom chart of accounts for single member LLCs.

For a single member LLC, your Equity section includes an Owner's Equity account. We recommend having sub accounts for Owner's Draw and Owner's Contributions as well. 

When you add money to your business, it is an Owner's Contribution.  When you take money out of your business, it's an Owner's Draw.

2. Transfers between bank accounts

The easiest way to add funds to your business or take funds out of your business is via bank-to-bank transfer.

Since you have an LLC in place, you should also have a business bank account for your LLC.  A business credit card is also recommended!

If not, hit the brakes and open your LLC business bank account pronto.

Not only does this simplify your business books, it is also a requirement of an LLC (that you do not comingle personal and business assets)

When you are ready, simply transfer money between your business bank and your personal bank accounts.

Let's not forget, record the transfer as an Owner's Draw or an Owner's Contribution in your bookkeeping.

3. Do not pay yourself payroll

Owners of an LLC do NOT pay themselves payroll.

This is because of how taxes are treated for LLCs. 

LLCs are disregarded entities (unless they elect otherwise).  What that means is that the LLC entity itself doesn't pay income tax, but instead passes through the income and deductions to the owner to report on their individual tax returns.

The only reason you have payroll as an LLC is if you have employees that are not owners!

In fact, hiring your kids or spouse and putting them on payroll is a great tax-saving strategy and we have a free guide you can download on this topic. 

As the owner, you do not get a W2 nor do you get a 1099 from your LLC.  

As a single member LLC, you report your business activity on your individual tax return on Schedule C.

4. How much do I take out?

You pay taxes on income net of deductions, not on how much money you draw or take out.

Taking money out of your LLC is a management decision.

As a rule of thumb, we always recommend you keep at least 2 months working capital in your business bank account to cover upcoming expenses.  

5. Don't forget to track it!

Like anything else in your business, keeping accurate records is key.

If you don't record income, you can get in hot water with the IRS.

If you don't record business expenses, you lose out on tax deductions and your taxable income is higher.

Having separate business books is essential and a bookkeeping software is key.  

If you need help setting up a QuickBooks Online account, let us know. This is one of the white-glove personal CFO services we offer. 

We also offer ongoing bookkeeping services if you want to outsource all of your bookkeeping as well.

 6. Plan for taxes

When you take money out of your business, there are no taxes withheld. 

Think about how you are paid as an employee of a company, your W2 plans ahead for you, and estimated taxes are withheld.

This is not the case for LLCs.

Setting aside a percentage of your earnings to plan ahead for taxes is smart business.  Making estimated quarterly tax payments is critical.

If you do not do so, you are living off money that isn't technically yours. You are in essence taking a loan from the IRS and possibly your state as well.

No one wants to have the IRS as a creditor.  Their terms are not favorable!  

Plan ahead for taxes. If you need help estimating your quarterly tax payments, let us know.

When we file tax returns for clients, this is a schedule we provide.  But if numbers have changed or you need updated payments, reach out and we can help.

Need help from a CPA with your taxes, business setup or tax strategy? Send us an email at [email protected] or book a call.

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Author:

Julie Merrill is a Certified Public Accountant, business and tax strategist and has over 25 years of experience working in large to small companies. She currently owns and runs her own tax practice.

Disclaimer:  The information provided in this post is for information purposes only and is in no way intended to be tax or legal advice.  For personalized tax and legal advice, seek counsel with your legal team or tax advisor.