How to pay myself as a small business owner

[ash-andersen]

Hello,

I've owned a small retail business for about 2 years now, and I'm wondering how I should pay myself. My business is registered as an LLC, and I'm wondering what is the best way to pay myself a salary? 

For the last couple of years, my entire profit from the year is what I've recorded as my salary on my taxes, but would it be more tax advantageous to pay myself a set salary each month instead?

I'm also curious about taking distributions and how that works. Is that a way to pay myself at the end of the year?

Thank you!

[Anonymous_]

A single-member LLC without an election to be treated as a corporation for federal income tax purposes is no different than a sole proprietorship with respect to IRS reporting. Thus, you cannot pay yourself a salary.

If you want to pay yourself a salary, you would need to make an election to have your LLC treated as a corporation for federal income tax purposes (most like an S corporation election). Otherwise, you would have to incorporate a separate entity in your state.

[Corrlich44]

Hi ash-andersen,

That is a great question! Although your business may be registered as an LLC, unless you make an application with the IRS to be treated as an S-Corporation by filing IRS Form 2553, all net earnings you receive from your business flow directly to you and are subject to Federal Income Tax and Self-Empoyment Tax at 15.30%.

While I want to assume that you are a sole-owner of your business, an LLC can be treated as an S-Corporation for Federal and State tax purposes, and you would be required to take a reasonable salary for someone in your position and only be subject to federal, state and FICA withholding taxes as your own employee and as the employer for the other half. 

Any remaining net earnings the business generates would be subject to Federal Income Tax as Ordinary Income.

Please review further how you can consider this option:

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations