A limited liability company (LLC) can recruit as many employees as it wants and pay them a competitive wage, just like any other business. An LLC may also pay its owners (members) in some cases. Reasonable salaries are generally tax-deductible, but you must also keep up with employees tax deposit and reporting requirements.
Salaries for LLC members
As the LLC structure allows, it can either be maintained and run by its members (owners) or by hired managers. If you are operating a multi-member LLC, you and your fellow members can’t withdraw salaries from an LLC. Instead, the payments that members receive are under the umbrella of profit distributions.
However, there is an exception here. If the LLC decides to assign responsibilities to few selected members in its operating agreement, it can then pay these members separate salaries. Similarly, if the LLC has hired employees to run its daily affairs, they can be paid salaries, since they’re not members of the LLC and do not receive profit distributions.
If you are operating a single-member LLC taxed as a sole proprietorship, you can’t withdraw your salary from it. Such an LLC is marked as a disregarded entity by IRS, and all its income passes through you anyway. But, if you opt to run your single-member LLC as a C corp, you can withdraw your salary from it.
The case of a C corp is a curious one. It is because such an LLC itself pays taxes on its income instead of you reporting the company’s income on your tax return. Again, if you hire someone to manage your C corp, that person can be entitled to receive a salary.
To conclude, you can hire employees regardless of the nature of your LLC once you have specified it in your operating agreement and then pay them salaries. As the salaries are operating expenses, they are always tax-deductible as per IRS rules.
Tax reporting requirements for salaries
If your business has salaried employees, you need to comply with the federal tax reporting requirements. Since the state laws for taxation vary, it is also crucial for you to check with your state tax agency about the tax structure of salaries employees.
Federal tax laws for salaried employees of an LLC require that you withhold federal income tax along with Medicare and social security taxes from the paychecks of employees. You are required to deposit the withheld tax amounts with the internal revenue service on a quarterly or semiweekly basis. Additionally, you are also required to file for the employer’s quarterly federal tax return under Form 941 to report the total amounts withheld for tax purposes.
At the end of every year, LLCs are also bound to file for the employees’ wage and tax statement under Form W-2. Similarly, you also have to file for the transmittal of wage and tax statements under Form W-3. These forms can be filed online with the social security administration.
LLC owner payroll
Because LLC treats their owners as self-employed, they don’t have to pay any payroll taxes. However, again, if some LLC members are working as employees and operate the LLC’s daily chores, filing for owner payroll taxes is required.
You should note that it should have its registered EIN for an LLC to comply with these requirements. For every matter related to the taxation on salaries of employees, an EIN is required. Once the LLC has its EIN, the taxation process becomes much more accessible and flexible than sole proprietorships and partnerships.
Comparing employees’ salaries with owners’ draws from LLC
It is an essential question for everyone new to LLC structures; how do LLC owners get paid? It has been discussed already in the article, but if you are still wondering about the difference between the salaries of employees and owners’ draw, here are your answers:
Owner’s draw: Since the LLC owners can’t pay themselves salaries unless the exceptions have already been discussed, how can they benefit from LLC’s profits daily? The answer lies in the owner’s draw. If there are no other members in your LLC, the owner’s draw is your only way of paying yourself the profits.
Draws doesn’t have to be in cash only – as you can pay yourself with the assets and other acquired materials of your LLC. But since there are no taxes withheld or remitted to the IRS n the draws, you will have to keep tabs on where that the cash is flowing, and you have to make quarterly payments to your LLC, or you can opt for payments at the end of the year.
Salaries: The salary term is only related to the LLC employees since the owners can’t pay themselves a salary, except the owners that are also working as employees of the LLC. The process of taxation on salaries has already been discussed in the article.
Tax evasion via LLC: Is it possible?
As we have discussed, if an LLC opts for corporate tax treatment, then it has to pay corporate income taxes on its profits. On the other hand, if it opts to be treated as a subchapter S corp. It will be exempted from corporate taxes, but the dividend amount paid to its members will then be entitled to taxation.
A corporation is also a legal entity, but it is separate from its owners, so a member of such an LLC that has opted to be treated like a corporation is entitled to receive W-2 income like any other employee, with the company withholding payroll and income taxes from the payment. However, the member-employees of the LLC are barely paid their salaries in line with their job description.
This move is to prevent employees from evading taxes by taking their pay as a dividend – a distribution of after-tax profit – rather than daily wages. Dividends are still taxable to the recipient, but in general, they pay lower taxes on dividends as they otherwise would on wages.
FREQUENTLY ASKED QUESTIONS
- What is the difference between LLC distributions vs salary?
The primary difference between the distributions and salaries is that while salaries are paid to the LLC employees, distributions are divided to the owners (members) of an LLC. It is also important to note that salaries of the employees of an LLC are taken out before profit distributions are made to the members.
- Can I pay myself a salary from my LLC?
You can only pay yourself from your single-member limited liability company by making an owner’s draw. In general cases, you can’t pay yourself a salary from your LLC, but since a single-member LLC is treated as a “disregarded entity’’, it means that that LLC’s profits and your own income are one and the technically same.
- How is an owner’s draw taxed in an LLC?
An owner’s draw is generally not taxable on the income of the business. However, it is taxable as an income on the personal tax return of the owner. Single-member LLC owners who take owner draws must pay self-employment taxes.