- Hi everyone, I'm attorney Aiden Durham
with 180 Law Co. in Denver, Colorado, and welcome back
to All Up In Yo' Business.
(casual uplifting music)
In this episode of All Up In Yo' Business,
I'm gonna go into detail about how you pay yourself
in a single member LLC.
I've talked about this topic before
in some previous episodes,
but in this one I'm gonna go over some
of the basics of how you pay yourself,
as well as some tips and info
to help you make sure you're setting aside enough
to save for taxes, and also just enough
to continue operating your business.
But before we get into it, please be sure to like,
subscribe and share, and check the description
for some links to some free downloadable guides
and checklists.
I've also got a written guide available
for you guys to download for free
that goes into more detail about how to pay yourself
and gives more examples and description
about how you go about doin' it.
All right, so how do you pay yourself
in a single member LLC?
I'm gonna get the first easy part
of this question out of the way,
which is the how.
The how of paying yourself
is for the most part completely up to you.
Unless your LLC's operating agreement
is specific on one of these,
then the dates, the amounts and the methods
that you use to pay yourself are at your discretion.
You can write yourself a check to pay yourself,
you can transfer money from your business account
to your personal account.
You can take that money for yourself
in whatever method or mode works best for you.
It really doesn't matter.
But you do wanna make sure that your bank jives
with however you plan to pay yourself.
I mean, if your bank charges you
to order or write checks and you plan
on writing yourself a check to pay yourself,
then maybe that's not the best method
in conjunction with the bank that you're working at.
Or if it's easier for you to transfer
the money from one account to another,
but your bank doesn't allow you to do that easily,
then maybe you wanna find a different bank.
I was recently introduced to Novo.
It's a completely online bank,
and you can apply and open your account online
in just a few minutes, which I love.
You only need 50 bucks to open the account,
and Novo lets you connect your account
to other bank accounts
so you can really easily transfer that money.
They also offer really cool integrations
like with Zapier and Plaid if you wanna get fancy,
so Novo is a really great option
if you're wanting an easy way to pay yourself,
because with the Novo app, you can just log on
and in seconds, you can have money transferred
from your business account
to your personal account pretty much
with any other bank as long as they connect.
The best part though is it's completely free.
Novo doesn't charge any kind of monthly account fees,
they don't have any monthly minimum requirements.
No ACH or wire transfer fees, it's completely free.
So if you're a new entrepreneur,
or if you're looking for a really accessible,
easy-to-use banking option, then I encourage you
to check out Novo.
And you can use the affiliate link
in the description to open an account,
and you'll get a 25-dollar credit directly
into your new account if you use that affiliate link.
All right, so the how part of how you pay yourself was easy.
You pay yourself however you want.
But now, let's talk about what goes
into figuring out how much to pay yourself.
So there are two things
that we need to consider before
we start figuring out how much
to pay ourselves.
The first is how the LLC is taxed.
In this episode, I'm gonna focus
on LLCs that haven't made any other kind
of tax election and are just taxed as sole proprietors.
So this means you haven't made an S Corp
or a C Corp tax election, you are a single member LLC taxed
as a sole proprietorship.
The next video I do is going to talk
about how to pay yourself in an S Corp.
So if you're curious about that,
keep an eye out for the next video.
The second thing, regardless of how your LLC is taxed,
is going to be the LLC's operating agreement.
If the operating agreement gives restrictions
or rules or specifications
as to when a member takes payment,
when you pay yourself, the amounts that you pay yourself,
or anything of that nature, then you need
to follow your operating agreement to a tee.
It's pretty rare,
particularly with single member LLC operating agreements
that there are those restrictions.
Typically, a single member LLC operating agreement
is going to leave those decisions up
to the discretion of the member.
So, if your LLC's operating agreement
is silent on it or if you don't have
an operating agreement, then it kind of defaults back
to your state's laws, which generally will require either
a unanimous or a majority consent
with regard to distribution.
So since you're the one single member,
you are the majority and the unanimous consent.
So, unless your operating agreement gives specifications,
then really you only need your own consent
to determine when and how much to pay yourself.
When you pay yourself from your single member LLC,
you are taking a distribution of your LLC's profits.
Obviously, the LLC's profits need
to be used for more than just funding your lifestyle
and paying you, those profits need to be used
to pay tax for the business
and to pay the operating expenses
for the business, and whatever else goes
into your business, that profit, those funds need
to be allocated to those things too.
So when you're determining how much
of your profits should be allocated to you,
you also wanna keep in mind allocating money to taxes,
allocating some to your operating expenses and overhead.
Hopefully allocating some to savings,
and then of course allocating some to paying yourself.
I'll tell you what I like to do the way that I do it.
What I like to do is I will add up all
of my profits over a given period.
I do this on a weekly basis,
just 'cause that's the way I like to do it.
But that part's completely up to you.
If you wanna do this weekly or biweekly,
monthly, quarterly, whatever it is,
add up all of your income and determine your profits
for that last period.
Then, allocate those funds between saving
for taxes, paying operating expenses,
just general business savings, and then paying yourself.
So let's start with taxes
and figuring out how much you should allocate
to saving and paying off taxes.
Unless you elect otherwise, in a single member LLC,
it's considered a disregarded entity,
a pass-through entity, which means
that all of the LLC's income is taxed and treated
as if it's personal income to you,
regardless of how much
or how little you actually pay yourself.
So if your business makes $150,000 in a year,
you're paying taxes on that $150,000,
even if all of it is still sitting
in the business account and you haven't taken
a penny of it for yourself.
The IRS considers that you've taken all of it,
so they tax it all as if it's personal income to you.
So with that income, you're gonna have
to pay just general income tax as well
as self employment tax, since you're not an employee
of your company, you're not paying yourself a paycheck,
where payroll taxes are getting taken out,
the IRS isn't getting their payroll taxes,
so instead they are giving you this self employment tax
so they can still get their cut.
The self employment tax in total is 15.3%,
and then your ordinary income tax
is going to depend on where you fall in the tax bracket.
So again, let's pretend my annual income
for the year is $150,000.
For 2019, that puts me in a tax bracket of 24%.
So that gives us a very rough estimation
of what we can expect to pay in taxes.
We've got that 24% ordinary income tax,
plus that 15.3% self employment tax.
So adding those two up, I can expect to pay roughly
about 39% in taxes.
Now, a big caveat to that,
this is not a super accurate estimation,
because taxes, ordinary income tax isn't applied that way,
it's a progressive tax system,
so even if you're in the 24% tax bracket,
that doesn't mean all of your income
is taxed at 24%.
And this also isn't taking
into account any other deductions or credits,
so this is just a good starting point
to give you an idea of how much
of your profits should be set aside for taxes.
So if you take that 15.3%
and add that to wherever you follow
the tax bracket, you know all right,
at least around this number is what I'm gonna be taxed.
So since that number isn't 100% accurate,
I'm gonna lower it down to 35% for the rest
of this video just to make the rest of my examples
a little bit easier.
So now we know about how much needs
to be allocated to our taxes.
Next, we wanna make sure we're allocating some
for our businesses' overhead and operating expenses.
You can figure this out by looking
at your tax returns for the past few years
or your profit and loss statements for the past few years,
or if your business is new and you don't have previous years
to refer back to, you wanna do some budgeting
and estimating to figure out what you can expect
to pay in your just general overhead
and operating expenses, and then you wanna estimate
about how much you're expecting to make over that year.
But if we're using the method
of looking back over previous years,
that'll give us a way to get an average
of how much we spent
in operating expenses versus
how much we made over those years.
So for example, let's say I look back over
the past three years and on average,
my business income is $100,000.
And then on average, I spend about $15,000 every year
on operating expenses and overhead.
That means based off of my previous history,
I can estimate that about 15% of my businesses' income
is spent on expenses and overhead.
So now we know we're allocating 35% to taxes
and 15% to operating expenses.
If you want to set aside a certain amount
or percentage for saving for your business,
that's certainly a great idea,
and you'll wanna factor that into the allocations too.
By default, I like to just set aside 5% of my income.
Sometimes I'll adjust that up or down,
but just kind of a general number that I use is 5%.
So now we've got 35% for taxes, 15% for operating expenses,
and 5% for savings.
That leaves 45% leftover,
which I can now take to pay myself.
So in this example, I am gonna add up all
of my profits from last week.
Let's pretend last week I had total profits of $5,000.
So now that $5,000 I'm gonna allocate
in those proportions that I just determined.
So 35% of that 5,000 is going to be set aside
or saved to pay for taxes.
15% of that $5,000 is gonna be set aside
and used for continuing operating expenses.
I'm gonna put 5% of that $5,000 into a savings account,
and then the rest, the remaining 45% I'm gonna take
for myself or set aside at least to use
to compensate myself.
And then if there are any other categories
that you want to include in there,
you can certainly do that too.
Like if you're trying to pay off a debt,
you can factor in a percentage for each period
that goes towards paying off your debt,
or any other goals or things that you want
to make sure your funds are allocated to.
And another important thing to remember
is that these numbers, these allocations,
these proportions can and should
be fluid and adjustable.
Obviously, hopefully our income
is gonna go up over the years,
our expenses are going to change,
how much we need to pay ourselves is going to fluctuate,
so those numbers really will need to change,
and it may take a while and do some trial
and error before you get those numbers
to a place that really work for your business and for you.
So these numbers and the numbers that I used
in the example are not any kind of set in stone number.
They can and should be tailored often
to fit your situation.
Whenever and however you choose to pay yourself,
it is important that you properly record
it in your LLC's books.
The money that you pay yourself as a member
of the LLC, it's not an expense to the business,
it's not a deductible expense,
and it's not a payroll expense.
It's typically referred to as a member distribution
or a member draw, a member withdrawal.
The most common term is member distribution.
And that's often how it would be recorded
in your records and in your accounting books,
would be as a member distribution.
Single member LLCs in particular
are often examined under a microscope
when they're involved in any kind of legal action.
Because there are no other members around
to provide those checks and balances,
it's easier for a single member to abuse
or take advantage of the liability protection
of the LLC.
So when push comes to shove, it's very important
that you properly record and document each
and every member distribution
that you take so it doesn't look
like you're just using the LLC
as your own personal bank account,
taking money out whenever you need it.
So when it comes to how you pay yourself
in a single member LLC, the key takeaways are this.
Overall, your tax payments will be exactly
the same regardless
of how little or how much you pay yourself.
There are no rules or requirements
for how you pay yourself in a single member LLC.
That part is pretty much up to you.
And finally for the sake of your personal liability,
you should keep adequate records of each distribution,
as well as documents, resolutions, spreadsheets,
anything that can help to show how you arrived
at the amounts that you are distributing to yourself.
So as you can tell, a lot needs to be considered when you
are trying to determine how much to pay yourself
and how to pay yourself in a single member LLC.
It's a delicate balance,
and a constant work in progress between your personal needs
and the needs of your business.
Therefore, it is strongly recommended
that you work with a CPA
or tax advisor who can help you determine
what your tax liability
is and help ensure that all of your tax payments
are gonna be made on time.
It's also great to bring a bookkeeper onto your team,
even if it is very part-time, just a few hours a month.
An experienced and knowledgeable bookkeeper will add such
a great deal of value to your business,
and it will save you a lot of headaches in the long run.
That's all for this episode folks.
Drop a comment below and let me know what you think.
And again, don't forget to check the description
for a link to download my written guide
on how to pay yourself in a single member LLC.
There's a lot more information and examples
and more demos of how you go about doing it
and figuring out those allocations.
Thank you all so much for watching.
I'm Aiden Durham, and I'll see you next time.
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