- Hello, everyone.
I'm Attorney Aiden Kramer
with The Law Office of Aiden H. Kramer in Colorado,
and you're watching "All Up in Yo' Business."
Since I get a lot of questions
and a lot of the same questions,
I figured I would take a few videos
to answer those questions.
Most of the questions that I get have
to do with single-member LLCs.
I'm guessing because there are a lot of single-member LLCs,
and it can be kind of confusing running them,
because you feel like you can kinda do whatever you want
since you're the only owner,
but there are still rules and laws that you have to follow.
So all of these questions that I'm gonna be answering
in this video and then a few of the next ones
have to do with single-member LLC.
So the one question that I absolutely get
more often than any other questions is,
how do you pay yourself in a single-member LLC?
If you're the only owner, how and when,
and under what method are you supposed to pay yourself?
So that's what I'm gonna answer today.
So as you can probably tell,
I take a lot of pride in the high quality
of these "All Up in Yo' Business" videos.
So in that spirit,
I've decided to hire a really expensive,
fancy graphics design company to come in
and design some pictures for me to help explain
how you pay yourself in a single-member, LLC.
So I hope these graphics help me explain that,
and I hope you guys appreciate it,
because, man, were they expensive.
The way to pay yourself in a single-member LLC
is going to differ depending on whether
or not you've elected to be taxed as an S corp.
If you're not sure what an S corp is,
go ahead and look back to my video,
"What the Heck is an S Corp,"
and hopefully it'll answer that question for you.
All right, are you ready for these fantastic graphics?
Let's get going with it.
Okay, so as you can see here, we have two business owners.
You can tell they're business owners,
because they're carrying briefcases,
and they're thinking about money.
They're both the sole owners in a single-member LLC.
As you can see in this fantastic graphic,
this business owner has elected to not be treated
as an S corp for tax purposes.
This one, on the other hand,
has elected to be taxed as an S corp.
So as the graphic shows,
when you're not treated as an S corp,
any money that goes into the LLC is treated basically
as personal income to the business owner,
and all of that income is subject to tax
at the personal level of the business owner,
and it's also subject to self-employment tax.
So because of that, a business owner
that's not treated as an S corp
can be subject to a pretty high tax rate.
This business owner, on the other hand,
since the LLC is being taxed as an S Corp,
is a little bit different.
The money goes into the LLC,
and then the business owner has
to take what's called a reasonable salary.
The IRS doesn't really give a whole lot of guidelines
about what a reasonable salary is,
but it's a good thing to talk over with your accountant
or with your tax attorney,
business attorney, to figure that out.
The LLC owner gets paid a reasonable salary.
That salary is subject to taxes
and subject to those self-employment taxes.
The rest of the money that the business owner takes
above that reasonable salary is as a dividend
and is not subject to those self-employment taxes.
So if your business is making a certain amount of money,
depending on what it is and what industry you're in,
and how much that reasonable salary would be,
the S corp election could potentially save you
a lot of money in taxes.
That's the basis between an S corp
and an LLC as far as tax goes.
So what does that have to do with paying yourself?
Well, I'll tell you what it has to do.
Since the business, which is not being taxed as an S corp,
all of that money is coming in as personal income
for the business owner.
The business owner can basically pay himself however,
whenever, and however much he wants to.
While that's true, the business owner has
to keep a few things in mind.
You have to make sure that after you've paid yourself
whatever you're gonna pay yourself,
the LLC is still adequately capitalized.
So this means there has to still be enough money
in the business, in the name of the business,
to pay for overhead, to pay for debt,
to pay for expenses that you expect to have,
and to potentially grow your business in the future.
So just because your business
is bringing in $10,000 a month,
doesn't mean you should be taking all of that
as your personal spending money
and paying yourself $10,000 a month.
You need to keep some of that in the business
for those expenses and to grow your business,
and you also have to make sure you save money
to pay for those taxes,
because with the self-employment tax,
you're gonna be subject to a pretty high tax rate,
and so you could potentially have to pay a lot of taxes.
So after you pay yourself,
you need to make sure you put away some
of that to pay for those taxes.
So when you are in an LLC
and you're not being treated as an S corp,
the way you pay yourself is you cut yourself a check
out of the business account,
and in your books, you would call that
a member distribution or a member withdrawal.
It's not really payroll, and it's not a salary.
It's not deductible like payroll is.
So you wanna just call it a member distribution
or a member withdrawal,
something similar to that in your book.
So I will pull back the curtain a little bit.
I like to be really transparent with you guys,
and I try to explain things as clearly as I can.
So in the spirit of that I'm going to describe
to you how I pay myself.
I am a single-member LLC, and I'm not treated as an S corp.
The reason for that, if you're wondering,
is because I've only been in business for a year,
and I didn't think that I would be making enough
in this year to really justify being treated as an S corp.
So what I do is I pay myself usually two
to three times a month,
and how I figure out how much to pay myself
is I basically take however much income my business has had
in that month or in whatever period
since I last paid myself,
and just to be safe, I take about half of that,
and then I take that as my own payment.
I do that assuming I know what my overhead's gonna be,
and I know whatever expenses I'm gonna have coming up.
So I make sure that all of those are gonna be covered,
and then I take about 50%.
And then from that, I take a little portion out
and put that away to pay for my taxes,
and then whatever is left after that is mine to spend
on the really important things like food, shelter,
clothing, makeup, shoes,
trips, wine, all the really good things
that you're supposed to spend your money on.
So then opposite to that, if you have elected
to be treated as an S corp, like I mentioned,
you have to pay yourself a reasonable salary,
which is gonna depend on your industry,
and how long you've been in business, and all of that,
which your accountant will hopefully help you figure out.
So you have to take that reasonable salary,
and that can be processed as payroll,
and then the taxes are gonna come out
of that reasonable salary,
and then anything else that you get paid,
you would call that a dividend,
and that wouldn't be subject to that self-employment tax.
So when you pay yourself as an S corp,
you're gonna have these two classifications
of when you take that money out.
You're gonna have the payroll,
and then you're gonna have the dividends
versus just that one member distribution
or member withdrawal if you're not taxed as an S corp.
So really that's it. It can be a kind of daunting idea.
How do I pay myself when I'm the only owner
of this business?
But really, as long as you keep your business
adequately capitalized and keep enough money
in your business to run and grow your business,
it is actually a pretty simple process.
So hopefully for all of those who had that question,
and who asked me that question,
I hope that answered it for you.
Otherwise, I hope this was helpful,
and I hope it helped all you single-member LLCs.
Thank you so much for watching.
I'm Aiden Kramer, and I'll see you next time.