LLC / Photo Credit: Score
HOW TO PAY YOURSELF IN AN LLC (In the Entertainment industry.)
Bruce Bisbey…please follow me at: https://dumbdogproductionsllc.blogspot.com or https://www.facebook.com/DumbDogProductionsLLC/ thank you.
Some people may think that being the owner of a Limited Liability Company (LLC) means you can pay yourself whatever you want. A million dollars per year sound good? Perfect, it’s automatically entered into your bank account! Of course that sounds incredible…but unfortunately, it is not reality.
Paying yourself as an owner of an LLC can be complicated, and there are tax consequences that come along with it. Keep in mind that you can only pay yourself an income based on the success of the business. You will not be able to pay yourself $10,000 a month if your business is only bringing in $5,000 each month in revenue. Plus, you have to consider the salary or hourly rates of other workers you may employ, as well as bills you must pay to keep the lights on.
You would be in a massive amount of debt if you were greedy and not flexible with your own income in this situation. As a business owner, your income may often be fluid — you could see some profitable months followed other months that aren’t as profitable. That is unfortunately part of owning and operating a business.
According to the Internal Revenue Service (IRS), compensating yourself for the work you are contributing to the business will depend on the business entity type you elect.
YOUR EMPLOYEE CLASSIFICATION
There are several ways you can classify yourself as an employee, and different tax specifications for each. Here are some of them:
Corporate Officer and Owner
An officer of a corporation is typically an employee who performs no services (or only minor services). This type of officer is not entitled to receive any pay. On the other hand, a corporate owner who conducts work in the business can receive a salary and will have to pay employment taxes.
Partner
A partner may go in on the business with one or more people, but they are considered more of an owner than an employee. The IRS details the following:
“A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it ‘passes through’ any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return. Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.”
Single-member LLC or Sole Proprietor
A single-member LLC or sole proprietor can draw funds out of their business at any time, meaning that they receive their “salary” directly out of the profits of the business. If you’re a sole proprietor or single-member owner, you’re not considered an employee who takes income in the form of a regular paycheck.
This also means no Social Security, Medicare, federal or state income taxes are directly withheld from your income. (Instead, you’ll have to pay an estimate of these manually to the IRS each quarter.) Your income comes from the profits of the business itself. If you are part of a multi-member LLC, it works a bit differently since you are taking a distribution of the business’ profits and sharing it between workers.
A DRAW
A ‘draw’ is a withdrawal of the LLC’s earnings. A member usually won’t take a draw unless there are profits.
A ‘guaranteed payment’ is money that a member takes out of the business whether there is a profit or not.
For income tax purposes you are charged with recognition of your LLC’s profits regardless of your draws. Tax recognition and flow of money are two separate things in an LLC.
Example:
If the LLC made a $20,000 profit, then you will report it through your Schedule C if the LLC is taxed as a sole proprietorship. You DO NOT report that same $20,000 a second time due to the fact that you withdrew it during the year as the owner’s draw.
In terms of showing your income to a bank, you can show them copies of your tax return which will have your Schedule C (or if you’re a multi-member LLC, copies of the 1065 and K-1).
HOW TO PAY YOURSELF IN AN LLC
By Brette Sember, Esq., Freelance writer; October 2016
Forming a limited liability company, or LLC, can be a great way to organize your company and protect yourself from liability. However, you still need to earn a living, so you may be wondering, how to pay myself from my LLC?
The two most common options are to treat yourself as an employee with wages, or to treat yourself as an LLC member and receive distribution from the profits.
Earn Wages as an Employee
Paying yourself from an LLC as an employee allows you to receive regular compensation that you can plan on throughout the year, which can be very helpful if you are seeking a regular income. To be able to pay yourself wages or a salary from your single member LLC or other LLC, you must be actively working in the business. You need to have an actual role with real responsibilities as an LLC owner.
Where there are multiple owners, if all of the LLC members participate equally in the operation of the business, you can't pay one a salary and not the others. However, if you are the only member that has a management role, you can pay yourself a salary without setting up salaries for the other participating LLC members.
Employee wages are considered operating expenses for the LLC and will be deducted from the LLC's profits. The IRS only allows reasonable wages as a deduction, so be sure any salary you pay yourself is within industry norms. You can also issue bonuses to LLC members who are employees, including yourself. Again, these must be reasonable related to the salary being paid.
You'll need to file IRS Form W-4 to determine the amount of payroll withholding from each paycheck you receive. The LLC will pay you as a W-2 employee and will withhold income and employment taxes from your paycheck. You will pay income tax on your wages earned.
Receive Distributions from LLC Profits
Another option for how to pay yourself in an LLC is to receive distributions of profits from the LLC each year. Each member owns a percentage of the LLC, called his or her capital account. Year-end profit distributions are made based on that percentage. So if the LLC had $100,000 in profit and you and the other member each own 50%, you can each receive $50,000.
You also could set up a draw to receive ongoing payments as a draw against the year-end profit. If you expect your percentage of the year-end profit to be $12,000, you could set up a draw to receive $1,000 each month. The total of all the draws throughout the year are deducted from the total year-end profit. So if your draw for the year totaled $12,000, but your share of the profit ends up being $15,000, then you would receive $3,000 at the end of the year.
If you are the only member of the LLC, you will pay income tax on your distributions and you will file Schedule C to report the profits and losses of the LLC with your personal tax return. If there is more than one member, the IRS treats the LLC as a partnership and you each report your share of the profit and pay income tax on that. The LLC will file IRS Form 1065 to report how profits are divided among the members.
It's important to note that receiving a salary and receiving year-end distributions are not mutually exclusive. If you get a paycheck, you're still a member of the LLC and entitled to your year-end distribution.
Work as an Independent Contractor
You may be thinking, are these the only options for paying myself from my LLC? A third option for LLC paying yourself is to hire yourself as an independent contractor, doing work for the LLC.
Here is an example: If you are a member of an LLC that prints signs, you can hire yourself as an independent contractor to do the graphic design for the signs. This type of arrangement may not offer as many benefits, though.
If you choose to pay yourself as a contractor, you need to file IRS Form W-9 with the LLC and the LLC will file an IRS Form 1099-MISC at the end of the year. You will be responsible for paying self-employment taxes on the amount earned.
Choose Not to Receive Payments
You also have the option to not pay yourself anything and to leave the profits in the LLC. You still will need to pay income tax on the profit earned, since the profits from your LLC pass through to your personal tax return.
Sources, References & Credits: Bruce Bisbey, Google, Wikipedia, Wikihow, WikiBooks, Pinterest, IMDB, Linked In, Indie Wire, Film Making Stuff, Hiive, Film Daily, New York Film Academy, The Balance, Careers Hub, The Numbers, Film Maker, TV Guide Magazine, Blurb, Media Match, Future Learn, Quora, Creative Skill Set, Chron, Investopedia, Variety, No Film School, How Stuff Works, WGA, BBC, Daily Variety, The Film Agency, Best Sample Resume, How Stuff Works, Bright Hub, Career Trend, Producer's Code of Credits, Truity, Production Hub, Producers Guild of America, Film Connection, Variety, Wolf Crow, Get In Media, Production Beast, Sony Pictures, Warner Bros, UCAS, Frankenbite, Realty 101, Liberty Me, Careers Hub, Sokanu, Raindance, Film Connection, Cast & Crew, Entertainment Partners, My Job Search, Prospects, David Mullich, Gear Shift, Video University, Oxford Dictionaries’, Boredom Therapy, The Bold Italic, Meets the Eye Studio, The Guardian, Elliot Grove, Jones on art, Creative Plant, Studio Binder, Film Tool Kit, Still Motion, Film Under Ground, Steves Digicams, Improve Photography, Guy Nockels, Namib Films, Film Support, Screen Craft, Movie Outline, Stack Exchange, Ken Davenport – The Producers Perspective, IRS, Incfile, Lisa Crocco, Brette Sember
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LLC / Photo Credit: Score
