LLC Earnings and Taxation
Partners in an LLC can take their earnings as draws. The partnership is a “pass-through” entity. Partners must report all profit and loss distributions. LLC owners may owe self-employment taxes on income, unlike employees.
LLC Compensation Methods
LLC owners receive compensation through distributions, taken as draws or passed through to personal tax returns. They pay self-employment tax on a share of profits and may receive a salary.
Payment Methods for LLC Owners
To determine the payment method, check with a tax professional based on your LLC structure and ensure compliance with tax regulations.
Single-member LLC owners can take draws from profits. Multi-member LLCs allow owners earnings as draws. However, partnership LLCs are “pass-through” entities.
Members can also access and pull periodic draws. In terms of wages, as long as you are actively involved you are eligible as an employee of your LLC.
Much like sole proprietors, partners in a partnership must use the draw method to pay themselves. You will be taxed like a sole proprietor for your percentage of the partnership’s income.
When you run an LLC, how you take money out will depend on whether it’s a single-member or multi-member LLC.
If an LLC has at least two members, it is generally classified as a partnership. Therefore, members can pay themselves by taking a distribution of their portion of the profits.
The type of LLC formed and the tax election made determine how members pay themselves and how businesses and owners are treated at tax time.
A Single-Member LLC is taxed like a Sole Proprietorship by default from the IRS. The member does not take a salary and instead takes a “draw” of the LLC’s profits.
If your LLC has multiple members and needs to divide payments, determine the most equitable way to divide payments based on each member’s contributions and respective company interests.
However, you’ll only pay self-employment taxes on the amount you drew from the partnership. Another way to pay yourself in an LLC partnership is to receive a guaranteed payment.