Today TaxMama hears from Carol in New York who tells us, “I have recently started an LLC. I am the only member. Do I take a paycheck from the business, or leave the money in the business? How are taxes figured? Will I pay personal and business income tax?”
Whew, lots of questions!
Well, an LLC is an interesting animal.
How you get paid by your business depends on how you chose to use that LLC. In all cases you want a separate bank account for your business, right? Here are your choices – and the way to get paid:
1) Single Member LLC – this is the default (or automatic) option – no paycheck.
Just draw money when you want it. All your profits be self-employment income – whether you draw the money out or not..
2) As a partnership – if you have a partner, or a spouse, who also owns the business.
Again, just draw money. It will all be self-employment income. The rest of the profits, even if you don’t take them, will still be reported on your personal tax return as self-employment income.
3) As a corporation – In that case, you must set up a payroll and draw wages.
Any profits left in the company at the end of the year are taxed at the corporate level.
Then, later when you take them out, they are taxed again as dividends.
4) As an S corporation – In that case, you must set up a payroll and draw wages.
Any profits left in the company at the end of the year are taxed only on you tax return.
According to Susan Wilson Solovic, the CEO, www.SBTV.com, most small businesses just start with the first choice until they build the business and get a better handle on their profits.
On the other hand, she suggests if you really want your profits to grow, treat your business like a business and do some planning about your choices and your marketing – and you will have higher profits.
You’ll get more ideas about how to make this decision in Small Business Taxes Made Easy. I suggest you read that – then schedule an appointment with your tax professional. Then decide how to get paid.
And remember, you can find answers to all kinds of questions about LLCs and other tax issues, free. Where? Where else? At TaxMama.com[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
- Ask TaxMama :: Where taxes are fun and answers are free
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- SBTV.com :: Wonderful source of small business news
- Small Business Taxes Made Easy :: Chapter 3 – explans the pros and cons of all business entities