How to Pay Yourself from an LLC

Who wants to get paid? I know I do! Before I dig into this, I want to point out a book I love and we're going to link it here, it’s the Profit First method. Profit First, it's just been revolutionary for most of my clients and, really, in my own business as well. I highly recommend that you give it a read so you understand the finances in your business. 

Now, you might be thinking, why have an attorney talking to me about paying myself for my LLC? Isn't that an accountant’s job or CPA’s?

Or is it QuickBooks’ job? 

Or wait? 

Whose job is it? 

I get asked that one too. Who do I talk to about how to pay myself because CPAs are tax people, right? So I'm going to dive into this as not only a lawyer, but as a business owner.

First off, your limited liability company should already have a business bank account set up. If you haven't read my other blog post or you don’t understand the protections of that, it's really important that we have everything separate. So, from the get-go, we're making the assumption that your LLC has its own business bank account and all those funds are going into there. Now, it's time to pay yourself. How do you do that? Simple!

From the logistics standpoint, you can transfer the money, write yourself a check, do a wire transfer, whatever makes sense, or process it through payroll to come to your personal account. We are never paying ourselves by running our business debit card at the grocery store or keeping track of the kid activities. We're not doing that! That money needs to be moved from the business bank account into your personal bank account first and foremost. 

Then the question comes: Well, how do I know how much and when do I do it? So this is where it gets important. Number one, you have to determine your tax status. Are you taxed as an S corp or a sole proprietor? For our purposes, we're assuming that you're a single member LLC. If you're taxed as an S corp, you do have an obligation to run payroll. That means you have to cut yourself a W-2 like you're an employee of your business.

Now, that doesn't have to be all the payment you pay yourself. It can be that plus a draw, which we'll get to. Keep in mind, if you are taxed as an S corp, you do have an obligation to cut yourself payroll. It can be a little bit, it can be a lot, but that payroll has payroll taxes, so you will run that through a payroll processor. Your accountant could do that. You can use Gusto, paychecks, or ADP, however you want to do it. But, you want to make sure that you are running it through an actual payroll processor so the necessary payments for taxes come out as if you got a check and you work for somebody. So that's your first step - determine that tax status - so you will know if you have an obligation. 

Now, once you've determined that and let's say that you go ahead and you put yourself on payroll but you still want to pay yourself more that you don't want to run through payroll. Alternatively, you're just a sole proprietor and you don't have that obligation. Now we're talking about what we call an owner's draw.

An owner's draw is the money that you will transfer to yourself, to your personal account, that does not run through payroll. It's not taxed as a paycheck, it's taxed differently as self-employment draw. Now a draw comes directly to you so, again, we're not running it through payroll tax, things like that. You will actually move that money to your personal account from your business account. Simple as that!

Now, with a draw, I want to point out a few things. One, you're not withholding taxes like you are on a payroll so it's important that you calculate where those taxes are, how much they need to be, and that they're put back so when it's time to pay them, you can pay them. Two, with a draw, you need to document it and be consistent. If you're paying yourself on the first of the month, the 15th of the month, or whatever that may be, just be consistent and document what that draw is. Remember, it is not running through payroll software so the tracking on it is different. You need to make sure that you have a way that you're tracking it using QuickBooks, you can do this on a spreadsheet, or however you want but you have to track it some way.

Now, let me backup for a second because this is my other favorite question- “Well, how much do I pay myself? Where are my margins? How do I know my profits?” This is where it's really, really important that you follow my other advice and you have your business bank account and you are running business expenses and income through that account. Initially, that's pretty much your P&L, your profit and loss statement. When you start out in business or you're at a couple years, you know even at this point in my business, it's still pretty close to a P&L for me. I can pull a business bank account, and I can look through it and see where those profits and expenses have been each month.

Now, what you're going to do is, if you follow the Profit First method, you take your gross revenue and you divvy it into buckets, percentages. Let's say 20% goes to taxes (that's just an estimate), 2% goes to your profit account, and maybe 40% goes to payroll. You start kind of breaking out into percentages or buckets so at the end of the month you can sit down and reconcile. Let's say that you grossed $10,000, you can take the percentages of that 10k and put it in the relative buckets. That will make sure your people are paid, you're paid, taxes are paid, and overheads are compensated for. It really just kind of gives you a good cushion and a good way to flow your business so you can pull out a paycheck, even if it's just a little bit from the get go.

A common split, again it depends on your business, will be paying yourself 50% of your gross income. Again, you have to check your overhead to make sure you can do that plus your taxes. Let's say you make $10,000 and $5,000 goes to your pocket and the other $5,000 gets split between taxes and overhead. If that works for your business, then great! But you have to play with that percentage and, then, allocate a little bit to see what works for you. That's where business ownership comes in and it's totally up to you! That's how you pay yourself out of your LLC. Those are some tips on draws and W-2’s, as well as different ways to allocate your funds. Make sure you can pay yourself consistently and document it!