Paying Yourself $

[Montana_Sam]

Alrighty!

After some great advice on these forums, I'm going in. I've registered an LLC with the state of Montana and have an affordable quote for general liability insurance to do tree and landscape work. Great. I have a half dozen or so ongoing clients with a comfortable amount of work on the books. I have an EIN from the Feds and am ready to open a business checking account with my local credit union. Now the questions begin!

My first Venmo transaction comes rolling in, lets say its $2000 paid to me personally for tree work. Terrific! I can deposit this into my business checking account. BUT, how do I go about paying myself????!!!! Having done freelance, under the table tree work for several years now, I know I need to start paying myself out of the LLC....but do I just write myself a check? Bank to bank transfer? How do I keep it all legitimate and above board? Paying into Social Security and having taxes taken out??

For you one-man shows out there with an LLC, how do you pay yourself????

 

[grizz55chev]

Alrighty!

After some great advice on these forums, I'm going in. I've registered an LLC with the state of Montana and have an affordable quote for general liability insurance to do tree and landscape work. Great. I have a half dozen or so ongoing clients with a comfortable amount of work on the books. I have an EIN from the Feds and am ready to open a business checking account with my local credit union. Now the questions begin!

My first Venmo transaction comes rolling in, lets say its $2000 paid to me personally for tree work. Terrific! I can deposit this into my business checking account. BUT, how do I go about paying myself????!!!! Having done freelance, under the table tree work for several years now, I know I need to start paying myself out of the LLC....but do I just write myself a check? Bank to bank transfer? How do I keep it all legitimate and above board? Paying into Social Security and having taxes taken out??

For you one-man shows out there with an LLC, how do you pay yourself????

Your taxman should be consulted.

 

[ATH]

Do not have clients write checks to YOU. The need to be written to the LLC.

Deposit those checks to the LLC's bank account. Only use that bank account for business expenses and to pay yourself. NO personal or home purchases for you.

There are several strategies, but what I do is have an electronic draw from the LLC to our personal account (at a different bank...but that isn't necessary). So essentially the business pays me a salary each month. If we were to need to cover a home expense that I wanted to pay for with business profits, I'd write a check from the business account to me (call it a performance bonus...or employee of the month...). I'd deposit that into our personal account then pay for the expenses out of our personal account.

Besides maintaining the corporate veil, this also helps our household have consistent income while the business absorbs seasonal ebbs and flows.

 

[Montana_Sam]

There are several strategies, but what I do is have an electronic draw from the LLC to our personal account (at a different bank...but that isn't necessary). So essentially the business pays me a salary each month. If we were to need to cover a home expense that I wanted to pay for with business profits, I'd write a check from the business account to me (call it a performance bonus...or employee of the month...). I'd deposit that into our personal account then pay for the expenses out of our personal account.

Thanks for the advice. This makes sense. So as far as I understand it, owning a small, single member LLC, you should write off/deduct as much expense as possible in the way of mileage, gas, equipment expenses, rental crap, whatever, and pay yourself a reasonable salary at the same time. What's left over is the "net earnings"...what happens to the net earnings come tax season?

ATH- how do you deal with self employment taxes at the end of the day? Social security, Medicare, etc.
I am currently in touch with a local CPA, I hope he's putting me on the right track.

 

[ATH]

"...what happens to the net earnings come tax season?"

Poof!


Obviously listen to CPA...I pay quarterly taxes on form 1040-ES.

 

[Montana_Sam]

Haha understood. Thanks for the help fellas!

 

[esshup]

Equipment expenses can cover excess business profit. For instance, this year the business can purchase a new truck and the business can pay for it with the profit, if it burns up all the profit for the year and the truck is still not paid off, then some of the profit next year can go to paying off the rest of the truck. Try to bank profit and pay cash for equipment without taking out a loan to buy it. That way if things slow down you don't have to worry about too many bills.

Don't forget to pay yourself a reasonable wage, like if you were working. Also, figure on charging double your hourly take home rate to have enough $$ for taxes, etc. A buddy I know that works for a large construction company says their internal rate for what they charge customers/figure into the bid for a job is 2x the hourly rate they pay the guys just to cover the taxes/insurance/union fees for them.

A forester I know who is in his 70's said he'd charge $10/hr per chainsaw for his chainsaws to cover gas/oil and expenses related to them. That was in the 80's, 90's and early 2000's. That way when he needed to replace one the $$ was there to do it.

Even though it is an LLC, you have to run the business like a business. The business only pays for business expenses, NOT personal expenses.

Get Quick Books and put everything on it, that will make life easier for your accountant/tax person. Make it a habit to enter information at the end of every day and you won't be overwhelmed by the amount of office work you have to do weekly.

I stock fish in ponds/lakes for private individuals, cities (public parks) and Homeowner Associations. My fish prices that I pay (wholesale) have increased anywhere from 8% to 22% from 2021 to 2022. I have to pass that along or I'd soon be just exchanging money and not making anything. I found out that I have to increase prices annually as long as I am having my raw material price increased by my suppliers. I get more push back if I "absorb" the price increase for a year and then make it up the next year along with that years price increase.

Another thing to keep track of is vehicle expenses/costs. With fuel/gas/oil going as crazy as it has been the last year and the foreseeable next few years, you HAVE TO take that into account. My expenses to go pick up fish from Indiana to Arkansas over the past 5 years (2 day trip, then one day to deliver the fish - roughly 1,800 miles per trip) have gone from $780 per trip to $1,950/trip. And that is figuring in only $20/hour for my time.......

 

[ClimberBusinessman]

Definitely consult with a reputable business accountant, but you can write yourself a check or do transfers from your LLC account to your personal account. Just never pay personal expenses directly out of the LLC account or you've essentially legally destroyed all the liability protections of the LLC, since you've "comingled assets".

For tax purposes, most LLC's are taxed either as pass-through entities (commonly referred to by the IRS as a disregarded entity, since for tax purposes you pretend it doesn't exist), or alternatively, you can designate your LLC to be taxed at the entity level with an S Corp designation or even a C Corp designation. If your LLC is taxed as a disregarded entity or as an S Corp, you'll have to pay income tax on the full amount of profits, regardless of whether or not you cut a check and have those profits in your business or personal account.

Keep in mind you can deduct all legitimate business expenses, and can generally write off equipment, such as trucks, ropes, and saws, in one year via a Section 179 deduction, or can instead elect to depreciate some of those expenses over a period of years by using MACRS or a similar amortizable deduction. If you sell the equipment after you have deducted it for a business expense, that is usually considered capital re-capture, and may be subject to capital gains tax. Capital gains taxes are $0 if you have less than about $41,000 in capital-gains derived income.
If you elect to have your LLC taxed as an S Corp, you gain the advantage of being able to divide your salary into two streams of income: a payroll-derived salary that meets the statutory requirement of being comparable in compensation to other company's salaries for your position, such as $40,000/yr), and a distribution, such as $20,000/yr, which is taxed at the capital gains rate, which is typically $0. In other words, you can pay yourself $60,000/yr and only pay taxes on $40,000/yr because any payment in excess of the statutory definition can be taxed at the investment income/capital gains rate, resulting in significant tax savings while still remaining fully legal.

 

[pdqdl]

Just a note about that paying yourself with a check.

If you pay yourself a legitimate payroll check instead of a straight check to yourself, the company will be obliged to pay 1/2 of the FICA (& Medicare) expenses. When you just take the money and figure to pay the taxes yourself, you'll pay the full amount of the FICA, currently at (6.2%+1.45%)*2=15.3% of your check.

Example: you get a gross earnings of $1000.00 for any given time period. The business withholds $76.50 from your check, and matches those funds and pays the combined expense of your wages ($923.50), your withheld FICA & Medicare of 76.50, the company matching expense of $76.50, for a total business expense of $1076.50.

And then there is this: "Fortunately for the self-employed, you aren’t ultimately on the hook for that entire amount, though. Half of your (FICA & Medicare) taxes — the amount that would have been paid by your employer — are deductible from your final income tax payments." This expense is also deductible as an expense from your employer, but it might tax a good tax accountant to advise you the best way to save some coin.

 

[Montana_Sam]

Thanks for all the feedback and advice fellas, truly this has been an educational season.

I'm wrapping up as the temps plummet, and the final checks are rolling in from a few big projects. I've grossed perhaps $25,000 this summer, which has been fantastic for me as this is a purely part time gig. I've taken minimal owner withdraws from the business acount (MAYBE $6k total...I'd have to check), and mostly spent the earnings on equipment rentals, gear, business expenses (food/lunch, accountant, PPE, saws, etc). and am ending the season with about $15k in the bank. My question is...what should I do with that? Pay myself a big fat xmas bonus or sit on the balance until the season gets rolling again in April? I understand I'm personally on the hook for paying the %15 +/- taxes on those withraws.

 

[ATH]

15%? Better save more than that! And it is not just on withdraws...any "retained" earnings (that $15K, for example) will also be taxed.

You have your income tax rate (maybe that is 15%, depending on your bracket). Then you have FICA - that is 15.3% by itself in addition to income taxes.

I'd suggest figuring out if keeping that $15K will bump you up a tax bracket (which could be about an extra 10% on your total tax bill). If it does, figure out how to spend it this year on something you can invest in for the business as a deduction (equipment?) or perhaps put it into an IRA (which will lock it away until retirement...so good or bad?). Obviously, take advise from an accountant, not some random guy like me on an internet forum. Just food for thought!

Otherwise, yeah, I'd keep the $15K for the business next spring.

 

[ClimberBusinessman]

15%? Better save more than that! And it is not just on withdraws...any "retained" earnings (that $15K, for example) will also be taxed.

You have your income tax rate (maybe that is 15%, depending on your bracket). Then you have FICA - that is 15.3% by itself in addition to income taxes.

I'd suggest figuring out if keeping that $15K will bump you up a tax bracket (which could be about an extra 10% on your total tax bill). If it does, figure out how to spend it this year on something you can invest in for the business as a deduction (equipment?) or perhaps put it into an IRA (which will lock it away until retirement...so good or bad?). Obviously, take advise from an accountant, not some random guy like me on an internet forum. Just food for thought!

Otherwise, yeah, I'd keep the $15K for the business next spring.

You're right on the fact the LLC's and S Corps tax both retained earnings and withdraws the same. The only exception is C Corps, such as Walmart or any of the really big companies, which are taxed at the entity level, and aren't pass-through entities. However, as far as I am aware, the combined employer/employee FICA rate is 12.4%, not 15.3%.
If you filed a special form to elect to tax your LLC as an S Corp, you can take some money as "reasonable salary", (whatever that is, perhaps $30,000-$40,000/yr?) and the rest of it as distribution that is considered a capital gain, at the capital gains rate, which is tax free income up to around $42,000/yr from that category.

 

[Montana_Sam]

15%? Better save more than that! And it is not just on withdraws...any "retained" earnings (that $15K, for example) will also be taxed.

You have your income tax rate (maybe that is 15%, depending on your bracket). Then you have FICA - that is 15.3% by itself in addition to income taxes.

I'd suggest figuring out if keeping that $15K will bump you up a tax bracket (which could be about an extra 10% on your total tax bill). If it does, figure out how to spend it this year on something you can invest in for the business as a deduction (equipment?) or perhaps put it into an IRA (which will lock it away until retirement...so good or bad?). Obviously, take advise from an accountant, not some random guy like me on an internet forum. Just food for thought!

Otherwise, yeah, I'd keep the $15K for the business next spring.

Real good copy ATH, thank you for the reply. I had forgotten about income taxes altogether...wouldn't that be nice

 

[ATH]

...However, as far as I am aware, the combined employer/employee FICA rate is 12.4%, not 15.3%.
...

12.4% for social security plus 2.9% for Medicare,

https://www.irs.gov/businesses/smal...oyment-tax-social-security-and-medicare-taxes