It’s true that under normal circumstances, the owners of an LLC cannot be in the company’s payroll.
However, there is a way you can make it possible.
There are several ways you can structure your business.
- Sole Proprietorships
Each structure comes with its set of rules. These rules also affect how the business owners are paid and the taxes associated with their incomes.
For “informal” sole proprietorships and partnerships, the process is simple. Owners can pay themselves (in the name of compensation) by transferring money from the business accounts to their personal accounts.
But what about the “formal” Limited Liability Corporations and S-Corporations?
Can owners of an LLC be in payroll? If so, can they be registered as employees in their LLCs?
Also, how frequently can LLC owners compensate themselves?
Read on to understand everything you need to know about LLCs and how their owners pay themselves.
How the IRS Treats LLCs
It’s crucial to know where LLCs stand with the IRS. It will help a big deal when it comes to understanding how LLCs compensate their owners.
First, you have to appreciate the fact that the Limited Liability Company (LLC) structure was established under state laws. It’s a business structure that was set up to protect its owner(s) from liability. The law considers you and your LLC as two separate entities.
Because LLCs are set up under state laws and not federal laws, this means that the IRS doesn’t recognize standard LLCs as “special” businesses.
If an LLC has only one member, the IRS treats it as a Sole Proprietorship. On the other hand, if an LLC has several members, the IRS treats it as a Partnership.
Remember, LLCs don’t pay company taxes. It’s for this reason that most business owners prefer this business structure.
We now have two types of LLCs.
- One-member LLCs
- Multi-member LLCs.
How Owners of LLCs Get Paid
We stated earlier that under normal circumstances, members of LLCs can’t be in their company’s payroll.
Continue reading to understand why.
For single-member LLCs, there is only one owner, who is also the sole worker in the company. The owner is the business itself.
As far as payment is concerned, the owner takes “owner draws” that allows him to transfer money from the LLC’s bank account into his or her personal bank account.
Therefore, there is no need for payrolls.
It’s for that reason that the IRS treats single-member LLCs as Sole proprietorships. All of the LLC’s profits are listed when the owner files his or her personal income tax returns.
For multi-member LLCs, several owners share the company’s profits and losses.
To access the profits earned and capital contributed, members have to take draws from the LLC by writing business checks to the members who claim payment. Therefore, they cannot be in the company’s payroll.
The IRS doesn’t tax the company on the profit made. Instead, the profits and losses are shared among the owners (as per their capital contributions). Each member is then taxed on his or her distribution of profits when he or she files his personal income tax returns.
How LLC Owners Can be Enrolled in the Company’s Payroll
It’s generally impossible for owners to be enrolled in their LLC’s payroll. However, there is a way you can go around this.
You can appeal can for special treatment with the IRS.
The IRS will now treat your LLC as an S-Corporation. Like multi-member LLCs, S-companies aren’t taxed. Instead, the company’s profits and losses flow and are listed in the members’ personal income tax returns.
Even though S-Corporations and LLCs share the same tax pass-through treatment, there is a huge difference between them.
Owner-Employee Payment in S-Corporations
Members of S-Corporations can be enrolled in the corporation’s payroll if they happen to do substantial work for the S-Corporation. They’re now both owners and employees of the business.
Please note that if an owner is to be listed in the corporation’s payroll, he has to fill in the IRS W-4 form, and his salaries or wages are subject to income payroll taxes like federal, state, and FICA taxes.
The remaining profit (after paying employees) is then distributed among all the owners of the business. The profit distributions are not subject to FICA and FUTA taxes.
Because profit distributions aren’t subject to FICA and FUTA taxes, some working owners use this as an opportunity to minimize the amount of payroll taxes they have to pay. They do this by paying themselves small salaries and channel the rest of their salaries and wages through their profit distributions.
The IRS and Social Security Administration are fully aware of this tax evasion tactic. They expect working owners to pay themselves reasonable salaries or wages that are equivalent to the roles and duties they’re performing for the business.
If the authorities find you guilty, they’ll either adjust your tax returns or cancel your business’ S-Corporation status.
We advise you to seek advice from a professional financial and tax advisor on how you can set the right salary for yourself as a working owner.
How Frequently Can Owners of LLCs Pay Themselves?
For single-member and multi-member LLCs, owners can pay themselves as frequently as they’d like by easily drawing money from the LLCs bank account into their personal accounts. All the LLC profits will be accounted for when filing their personal income tax returns.
We’d advise you to make quarterly tax payments to be able to accomplish your tax obligations. Consult a tax advisor to determine how much you’re supposed to pay quarterly.
How Frequently Can S-Corporation Owner-Employees Pay Themselves?
The only way you can be listed in your company’s payroll is by applying for the S-Corporation status.
As an owner and employee of the business, you’ll be enrolled in the business’ payroll like a regular employee and will be expected to pay all the relevant payroll taxes. However, you’ll still receive your tax-free profit share.
It’s up to you, the owner, to decide how frequently you want to receive your salary. For example, you can choose to receive your salary or wage on a bi-weekly or monthly basis.
We’d advise you to match your owner-employee payment cycle with your employees’ payment cycle. This will simply work for your in-house payroll processing team and cheapen your outsourced payroll processing costs. It will also make auditing easier, thereby reducing auditing-related costs.
Can an owner of an LLC be in payroll?
No, however, the owner can appeal for an S-Corporation status.
Once that is done, the owners can be enrolled in the company’s payroll like any other employee and will be required to pay payroll taxes on their wages and salaries.
Never the less, the owner-employee will still be able to receive his share of the business’s profits as one of its owners.
Be careful when compensating yourself for work done in the business, your salaried amount needs to be reasonable and proportional to the responsibilities you have in the business.