- Hi everyone.
I'm attorney Aiden Durham
with 180 Law Co. in Colorado.
Welcome back to All Up In Yo' Business
where today I'm gonna give you a few tips
when it comes to paying yourself
from your business or your LLC.
Before we get into all that,
please do subscribe
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click that little bell
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and check the description
for links to additional information and resources.
And while I am a lawyer,
I am not your lawyer.
The stuff I talk about
in this video should not be taken
as a substitute for legal advice
because it's not.
If you need help with any legal matter,
you should consult with a lawyer
who's licensed in your state.
So for most of us, maybe not all of us,
but I believe most of us,
we probably get into business
and we form our business, form our LLC
because we want to make money.
Sure, we might have some other altruistic purposes.
We want to help people,
we wanna do good in the world.
That's great, that's great
but we still need to support ourselves
and earn money for ourselves.
And when it comes to paying yourself
from your LLC or from your business,
there are a few things that you can do
that can kind of really screw it up.
So my first tip for paying yourself
from your business is keep in mind
how your business is taxed.
If you're formed as a single member LLC,
and you're not taxed as an S corporation
or even a multi-member LLC,
not taxed as an S corporation,
it's basically as if the LLC doesn't exist.
If I'm a single member LLC,
I'm taxed as a sole proprietorship.
Under the IRS,
an LLC isn't an entity type
that the IRS really recognizes.
LLCs as a single member are taxed
as sole proprietorships
and as multi-member LLCs,
they're taxed as partnerships.
And whether sole proprietor or partner,
it's taxed at the individual level.
There's no corporate tax,
there's no business tax for an LLC.
And so what that means
is that you are going to pay taxes
on your business' income
regardless of how much
or how little you've paid yourself.
Let's say my business
as a single member LLC has a taxable income of $100,000
and I've paid myself maybe $50,000.
It doesn't matter that I've only paid myself 50,000.
I have to pay taxes on all 100,000 of that income.
Hi, pal.
Hi.
I don't think anyone can see you.
Bye, Rocky.
So keep that in mind
when you're paying yourself.
Don't get bogged up,
don't get stuck in the weeds of, oh,
if I pay myself too much,
am I gonna have to pay more taxes?
No, you're not going to.
The taxes are going to be the same
regardless of how much
or how little you've paid yourself.
That's not the case necessarily
if your business is taxed as an S corporation,
then it does kind of make a difference.
But if you're not taxed as an S corp,
it doesn't matter.
My little tap dancer.
My next tip is to pay yourself
either by writing a check
or doing an account transfer.
You can technically pay yourself
however you want to.
There's no like, rule about how the method
that you're supposed to use
to pay yourself from your business.
You can write yourself a check,
you can do an account transfer,
you can withdraw cash
and deposit that.
If there are, I guess the Bitcoin,
you can pay yourself however you'd like,
whatever method you want to.
But we are going to want to be able
to look back in our records
and see what was a member distribution
versus maybe an expense
that is a deductible expense
because member distributions,
that's the word or member draws,
that's the term for when we're paying ourselves,
those aren't deductible expenses.
It's not like a payroll expense
because again, tax-wise, they don't care.
They don't care that you're paying yourself that.
So for the purposes of bookkeeping
and filing taxes
and just knowing how much you've paid yourself,
I find it's easiest to do that
if you're writing yourself a check
so then you can put a memo on it,
says, you know, member distribution
or if you do an account transfer
like an ACH transfer,
usually you can put a little memo on that
that says member distribution.
So then when you go to file your taxes
or when you're looking through your records,
you'll know, oh yeah,
this was when I distributed
some of that profit to myself.
Tip number three is don't forget to save for taxes.
We're not employees of our business
unless we're taxed as an S corp,
then we kind of are.
But if we're not taxed as an S corp,
we're not employees,
we're not getting a paycheck,
we're not getting a W2,
we're not having taxes withheld
from our paycheck
like we are if we're employee.
So we have to remember
that we're gonna have to pay these taxes
at some point later on
and so we should set some aside
and save for that purpose.
Exactly how much should you save for taxes?
It depends.
It's, you know, it depends.
There's no strict number to stick to.
Generally speaking,
between, you know, 15 to maybe 30%
of your business' income,
that is a good amount to set aside for taxes.
That doesn't mean all of it's going to be paid out in taxes
but at least, you know,
even if you overestimate,
at least you'll have more than enough
to pay for the taxes that you have to pay.
So again, if your business has a taxable income of $100,000,
I wouldn't suggest paying yourself all $100,000
because you know,
some of that's gonna have to go to taxes
and of course, some of it's gonna be, you know,
I assume need to be kept in the business
to continue operating the business.
So when you are paying yourself,
make sure you're keeping in mind,
mm, some of this should be set aside for taxes.
And finally, my last tip,
and really the most important tip I think,
is to have a separate bank account
that you're paying yourself from.
More specifically,
make sure you have a dedicated business bank account
and that you are paying yourself
from a business account
and putting that money
into your personal account.
If you have money from your business deposited directly
into your personal account,
as an LLC and especially as a single member LLC,
oof, that is a big time no no.
You really put yourself at risk
of piercing the corporate veil in that instance.
So you really must have a separate,
dedicated business account
or multiple business accounts.
And then you pay yourself
from your business.
Write yourself a check
from your business account,
deposit it into your personal account.
Do a transfer from your business account
into your personal account.
Do not put all your business money
into your personal account.
And that's it, that's bad.
And you don't have to stop at just one account.
You can have multiple accounts.
I personally, what I do, I have a handful
but I have an operating account.
That's where my income, my client,
and when people pay me,
that money goes into my operating account
and that's where I pay for my business expenses,
comes out of that operating account.
Then I have a separate savings account
where I put some money to save for taxes.
And then I have another checking account
that's my owner's compensation account
and that's where I put some money
that is specifically reserved
for me to pay myself with.
You don't have to do it that way.
You can have just one account
and remember, you know,
maybe I have to save this much for taxes,
I can pay myself this much.
But, you know, make it easy on yourself.
Have separate accounts if you'd like
and make it easy on yourself
and make sure you have a bank
that is going to make it easy
for you to pay yourself.
Like if you wanna just transfer money
when you're paying yourself,
but your bank charges you for ACH transfers,
that's not gonna be ideal.
Maybe find a bank that doesn't charge
for those types of transfers.
And there are a lot of banks out there now
that are offering multiple accounts
or kind of sub accounts
within one main business bank account.
So you can have
as many different accounts as you want.
One for taxes, one for paying yourself,
one for saving for fun stuff.
You can have as many accounts as you'd like
and you can use them
for whatever purpose you want.
Check the description
because I've got a few banks
that I'm familiar with
and that I've worked with
that I really like for this purpose
that make it super easy
to just operate your business generally,
but also to pay yourself
and help with kind of allocating
some of your income for taxes
and paying yourself and everything in between.
So check the description for more info on that.
And there you have it, folks.
So overall, the how of paying yourself
is you can pay yourself however you'd like
for the most part.
But in doing so,
we wanna make sure we're saving for taxes.
We wanna make sure we're going to be able
to remember that we paid ourself
in that method or on that date.
And we're gonna wanna make sure
we're not putting our own liability at risk
and risking piercing the corporate veil
with co-mingling and mixing our personal
and our business assets.
If you learned a thing or two,
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Click that little bell
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And don't forget to check the description
for links to additional information and resources.
I talked a little bit about S corps
and how it's a bit different
if you're paying yourself from an S corp.
If you are taxed as an S corp
or you'd like to be,
and you're wondering, wait,
how do I pay myself in an S corp,
I've got a video talking all about that of course.
You can check that out right here.
I'll meet you over there.
Thank you so much for watching.
I'm Aiden Durham
and I'll see you next time.