As an sole proprietor LLC, should I show a salary or owner's distribution?

[SM3C]

To minimize taxes as an individual, what is the best way for me to reflect the money I take out of my consulting business?

[RSUMan]

A single member LLC is a disregarded entity for IRS purposes.

You should file the business revenue and expenses on Schedule C.

You will not show salary to you or owner's distribution to you as an expense.  The net profit of the business will flow through the tax return to Schedule 1 and then on to the Form 1040.

[rschule1]

The first reply is great advice. As an add on - taking a salary would not likely lower your taxes, hence another reason not to take a salary.

[KochuK]

Hi Smunt3, thank you for posting an event question.

You indicated that you are a sole proprietor LLC.  

A single-member LLC is not treated as an entity separate from its owner for federal income tax purposes. A single-member LLC owned by an individual files Schedule C. You can deduct payments to outside contract labor. Your own withdrawal or payment to yourself is not a Schedule C expense.

Gross income less business expenses = net profit (loss)

Please refer to Schedule C Profit or Loss From Business form and instructions.

https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

https://www.irs.gov/pub/irs-pdf/i1040sc.pdf

To minimize tax as an individual, it is your best interest to capture all the allowable business expenses, which is detailed on instruction link starting page C-6.

Hope the above helps. Thank you again!

Kochu Kitty

[SM3C]

Thank you. So my Schedule C/1040 should show amounts for:

Line 16, 18, 22 (Tax)

Line 23 (Other taxes, including self-employment tax, from Schedule 2, line 21)

Right?

I still have to complete my 2022 return but I am concerned that my 2021 return (which I am using as my template) is incorrect. It shows:

Line 24 (total tax): 37% of my taxable income.

In 2021, my tax bracket should have been 22%. 

How could that be? Thanks for the help!

[mbpeddie · Accepted solution]

Hello,

In general, a sole proprietor can take money out of their business bank account at any time and use that money to pay themselves. If the business is profitable, the money in your account is considered your ownership equity and is the difference between your business assets and liabilities. This type of transaction isn't considered a salary, but rather a "draw." To perform a draw, you would write a business check to yourself.

This check is not subject to federal income tax, state income tax, or FICA taxes.

That's because the IRS treats the business’s profits and a sole proprietor's personal income as the same thing. In other words, after you’ve deducted business expenses on Form 1040 Schedule C (for sole proprietors) or Form 1065 (for partners), the remaining profit is considered personal income.

However, you only file your personal income tax return once a year, and you may want to pay yourself on a more consistent basis. To do so, you'll need to look at financial projections (if you've just launched your business) or past financial performance (if you’ve been in business a while) and estimate your business's profits. Based on that number, you can set up a consistent salary for yourself. That would require filing quarterly payroll tax returns and withholding income taxes and social security and medicare taxes.

[RSUMan]

If your Schedule C business showed a profit, yes you should have SE taxes showing up.

You can review the 2022 return in TurboTax online by going to Tax Tools on the left side menu; then select Tools; then select the first bullet point in the center o f the screen View Tax Summary;  then go to left hand menu and select Preview my 1040.

You can get an Expert review before you file the 2022 return.

Regarding the 2021 return, if you download a PDF, there should be a Tax History Report showing your marginal tax bracket.  If that is showing 37%, then after the October 16, 2023 peak, I would call in to our Tax Advice queue and carefully go through a potential amendment of your 2021 tax return (download the .tax file first) and make sure the 2021 tax was calculated properly.

[SM3C]

This has been the most practical advice I have received on how to handle my 2021 return. It has bothered me. Thank you for handling my questions. 

[SM3C]

I liked this answer as it educated me when a draw or salary makes sense. It also gave advice on how to forecast and plan for a salary and tax considerations related to it. Thank you.