welcome back to taxes Made Simple I'm
your host Carlton Dennis and in today's
video I'm going to explain exactly how
to pay yourself as a limited liability
company in 20125 a lot of people form
llc's to take advantage of the
tremendous benefits that they offer but
then once they start making money they
realize that they have absolutely no
idea how to pay themselves correctly
from their llc's the last thing that you
want especially when you're finding
success in your business is to get in
trouble because you didn't pay yourself
correctly from your LLC so if you're
somebody that's new to business make
sure you watch all the way till the end
of this video cuz I'll give you insights
on how you need to pay yourself let's
dive
in the first thing that you need to know
about paying yourself as an LLC is that
when you're the owner of an LLC you have
the option to pay yourself through what
is called an owner's draw remember that
phrase owner draw keep in mind that
owner draws are also commonly referred
to as owner's distributions but in
owner's draw or in owner's distribution
is when you as the owner of the business
withdraw money from the business and
transfer it to your personal account so
that you can use it for personal use
remember as a business owner your goal
should always be to keep your personal
finances and your business finances
completely separate from one another
otherwise you can accidentally co-mingle
funds which can get you into legal
trouble with the government which you
definitely don't want to deal with so if
you're somebody that wants to be a
steward of your finances you'll make
sure you don't Co mingle owner's draws
are designed to prevent this exact thing
from happening so when you think of an
owner's draw think of money being taken
out of your llc's bank account and being
moved to a personal account that you can
use for personal expenses now I know you
might be wondering Carlton how exactly
do I set this owner's draw up don't
worry I've got your back here here are
the steps on how you take the owner's
draw step number one let's make sure you
have your EIN number Ein stands for
employer identification number an EIN is
a nine-digit number assigned by the IRS
that is used by the government to track
your business for tax purposes you can
apply for an EIN directly on the irs's
website the IRS requires you to provide
some basic information about your
business when you apply for an EIN such
as the type of entity that it is but
once you receive your EIN from the IRS
you can move on to step number two step
number two is to make sure that you set
up your business bank account if you
already have one for your LLC then great
but if not you're definitely going to
need to do this this is a very important
step to getting paid most banks have
options for business bank accounts so
you can go to your Preferred Bank open
up a business bank account with your EIN
number you'll need your EIN to open the
business bank account once you provide
the bank with your EIN they will link
the Ein to your business bank account so
that this account is tied to your EIN
instead of your Social Security after
your business bank account is set up you
will be able to start depositing money
earned by your business under its EIN
number to this account and you can store
the business's funds in this account now
here is where it gets interesting and
here's where the owner draw comes into
play step number three make your owner's
draw after your business has made enough
money and you're ready to start paying
yourself personally and taking some of
the profits from your business to save
for taxes you can send the amount you
want to take from your business bank
account to your personal checking
account you can do this via a check a
bank transfer or just cash I recommend
doing it via a check or bank transfer so
that there is more of a paper trail just
in case you need this later on you
should also keep a record of the draw
including the date the amount and the
purpose for your bookkeeping records it
is crucial to keep proper records of all
of your business transactions including
owner's draws once you transfer the
money and you record the transaction
then the owner's draw will be complete
but once it is in your personal bank
account you will be free to use it for
your personal purposes just keep in mind
because this is absolutely crucial this
is your personal account when you have
an LLC you can use the owner's draw in
lie of a salary this is where a lot of
people get confused when you're an LLC
you do not have to pay yourself a set
salary it is up to you to decide which
intervals you pay yourself in and how
much you pay yourself in each
distribution the inter evolves and the
amounts do not have to be even many LLC
owners enjoy the flexibility that owners
draw provide this is because this
flexibility allows them to leave more
money in the business bank account when
the business needs more cash on hand and
to withdraw larger amounts of money when
they're ready to take more profits
personally but here's a word of caution
when it comes to owner draws some new
business owners make the mistake of
withdrawing too much money too soon and
this is understandable because after all
it can be very exciting when you form a
new business and when it's starts making
money you get excited you want to
reinvest personally into the stock
market but I want to warn you right now
make sure you don't withdraw too much
money to quickly through your owner's
draws this is because you need to keep
enough money in your business bank
account to cover all of your expenses
and make sure that one of those expenses
that you're able to cover every year is
your taxes do not forget about your
taxes if you are new to self-employment
you need to be aware that you will have
to pay a
15.3% self-employment tax on top of your
regular income taxes the self-employment
tax covers your Social Security and
Medicare taxes 12.4% goes to Social
Security 2.9% goes to Medicare so don't
forget about this otherwise it could
come back to bite you later the last
thing you want is for your business
checks to start bouncing because you
underestimated your expenses and your
taxes and your business account balance
goes to zero so always make sure you
leave enough money in your business bank
account especially when you're just
starting your LLC and you're just
getting to managing all of your expenses
it could be a little new for many
business owners and take some time to
get used to now let's go over an example
let's say you're a new LLC owner that
made 130 Grand you had 70k worth of
expenses including taxes you paid
yourself $60,000 in this circumstance
then you would be putting yourself into
a lot of trouble don't cut it this close
make sure you always leave yourself some
Breathing Room don't forget that an
unexpected expense can tend to pop up
you never know when you're going to
accidentally drop your business laptop
or when suddenly you need to buy some
more Google ads or Facebook ads to grow
your business now here's some other tax
information for LLC owners that is
important to know now that you know
exactly how to pay yourself as an LLC
with your owner draws I want to talk
about some of the tax information that
you need to know regarding the money
that your business earns and that you
pay yourself for tax purposes llc's are
considered pass through entities do it
with me pass through entities it means
that business profits and losses and tax
obligations pass through the business
entity to the owner one of the great
advantages of this corporate structure
is that it means LLC owners do not have
to deal with double taxation let me
explain double taxation is when a
business entity is taxed at the
corporate level and then the owner of
the business also has to pay taxes on
the profits that they make from their
business some other business entities
such as the C corporation has double
taxation but as an LLC owner the IRS
will only tax your business profits one
time so keep in mind that you will owe
income taxes on your LLC profits
regardless of whether you leave the
money in your business bank account or
if you transfer it to yourself
personally the IRS will come for its cut
of your business's profits no matter
where you store it personal account or
business account Uncle Sam always gets
his cut let's discuss limited liability
if you're new to llc's I just want to
quickly remind you that llc's offer
limited liability protection this is one
of the main benefits and probably one of
the primary reasons why many LLC owners
set up llc's in the first place
liability protection to you means that
you as a business owner will have
limited liability in the event your
business is sued or if it has debts
called in so for example in the event of
a lawsuit against your business if you
have an LLC the person who is suing you
would only be able to sue what's inside
of your LLC the business assets such as
your business bank accounts or other
assets that your business might own he
or she would not be able to come after
your personal assets such as your
personal bank accounts or your home
depending on how your LLC has been
structured and how you have maintained
your corporate veil the combination of
having liability Protection Plus pass
through taxation is what makes LLC is
such an amazing entity type and is why
tens of millions of Americans choose to
go with the LLC over other business
types when first getting started but
down the line however many LLC owners do
decide to switch over to the es Corp in
order to mitigate their self-employment
tax obligations you see as your business
becomes more and more profitable the
self-employment taxes can get larger and
larger and larger and it becomes more of
an issue if you want to learn more about
ESC Corps and when to switch from an LLC
to an S corporation then check out this
video right here it goes over when to
switch from an LLC to an S corporation
if you want to have a better way of
controlling your finances as you scale
you're going to have to adopt the escort
now here's a question from one of my
subscribers I'm going to answer a
question that a subscriber asked about
this topic from a different video I did
on paying yourself as an LLC but first I
want to remind you guys that if you have
any questions about paying yourself as
an LLC or anything else related to
entity structuring and tax issues go
ahead and book a complimentary
consultation with my tax firm by
clicking on the link in the description
below we'd be happy to grab a call with
you to see what we can do to help okay
this question came in from Jada mc16 on
how to pay yourself as an LLC in 2022
which was a video I did a few years ago
the question was so what percentage
should I pay myself as a rule of thumb
and how often monthly or annually this
is a tricky one because depending on
your profession will decide how you're
supposed to compensate yourself from
your LLC or from your S corporation
let's just say that you've already
switched your LLC to an S corporation
this is when the IRS will require you to
give yourself a salary a normal salary
for an S corporation owner is different
depending on what your business type is
maybe you're an electrician maybe you're
a contractor that's fixing homes and
toilets if you're doing these types of
roles we have to look based on your
jurisdiction based on your area what
would be a reasonable salary for you in
the location city state and zip code
that you live in relative to the amount
of business profits that's left over if
your business made $100,000 in business
profit it wouldn't make sense to just
give you a salary of $70,000 even though
though the average electrician makes
$70,000 in the United States we would
still want to make sure the salary
portion is reasonable relative to the
net profit of the business and this is
so important the reason I say that is
because when you switch from an LLC to
an S corporation instead of paying
self-employment taxes you're actually
paying payroll taxes so if you take a
very high salary from your Escort you're
going to be paying into more Social
Security and Medicare taxes which
ultimately may not benefit you in the
the long run from a tax savings
perspective it may benefit you if you're
trying to qualify for a loan and you
need to show more money but really we
want to make sure that you're taking a
reasonable salary relative to your net
profit this is why in our office we do a
what's called a reasonable compensation
audit if you're an LLC taxes an S
corporation or you're a traditional S
corporation owner it's important for us
to take a look at your strategies that
you're implementing before the end of
the year to see what's offsetting your
business's profits and then determining
what your salary needs to be after the
fact fact if you would love to learn a
little bit more about how we can do tax
planning for you go ahead and visit the
links Below in the description I look
forward to booking a call with you and
helping you save money this year thank
you guys so much for watching this video
If you like this video you can do
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