How to Get Paid the Most as an LLC or S Corp

How to Get Paid the Most as an LLC or S Corp

 

Have you ever wondered how you are actually supposed to pay yourself in your business? Does it differ if you are an LLC or S Corp? It sure does. Here’s how to get paid the most as an LLC or S Corp. Plus, how to avoid the extra taxes! 

 

 

 

 

Disclaimer: What kind of attorney would I be if this didn’t have a disclaimer? I’m a licensed attorney and I practice in Utah and Idaho. I am not your attorney. This is not official legal advice. If you have any questions, please consult with a legal professional in your jurisdiction.

 

 

 

 

How to Get Paid the Most as an LLC or S Corp

 

Let’s say you’re starting to make a good amount of money from your business. You may be wondering how to pay yourself some of that money without getting in trouble. That’s a great question!  Here are 3 rules to keep in mind as a business owner when it comes to how to get paid the most as an LLC or S Corp.

 

Business Money Rule #1: Keep your bank accounts separate.

 

From the very beginning, you want to have one bank account for your business and a separate one for your personal money. One of the biggest mistakes I see new entrepreneurs make (and even seasoned entrepreneurs) is comingling their money. 

 

The biggest problem with throwing all of your money into one account is making it harder to distinguish your business income and expenses from your personal life. If you are already set up as an LLC, one of the first rules with having one is having a separate business account. 

 

Along with having a separate business account, you want to make sure that you are using an official payment processing tool when sending or receiving money. Some options I recommend are Square, PayPal, or Venmo Business. Using one of these will ensure protection for you as the merchant of your business. 

 

 

 

Business Money Rule #2: Use one of these two ways to pay yourself.

 

The first way you could pay yourself from your business is to write yourself a check. You could use the business checkbook and make it out to yourself, so you can deposit it into your personal account. 

In the memo line of the check, you could write something such as, “profit distribution,” “owner’s compensation,” or something like that. This method is recommended no matter how small or big of an amount of money you are giving yourself. 

 

The second way you could pay yourself is by doing a direct bank transfer. And you can use similar language in the memo for that as well. Including the memo will help keep your bookkeeping really clean and clear with where your business money is going, which is always a huge plus to have! 

 

Business Money Rule #3: Understand how to pay yourself and pay taxes. 

 

We will run through two scenarios here. The first one relates to owners of an LLC or a sole proprietorship. The second will be if you are an LLC being taxed as an S Corp. 

 

Scenario #1: LLC/Sole Proprietorship

 

If you do not register your business as an LLC, the IRS defaults you as a sole proprietor. So, just know that you will still be recognized as some type of business entity even if you do nothing. If you are a sole proprietor, all of the money you make will be considered your personal income and you will have to pay self-employment tax on that. 

 

I have seen a huge myth going around that if you set yourself as an LLC you avoid some sort of taxation, or if you stay as a sole proprietor you don’t have to pay as many taxes. That’s not true. The IRS does not care and will hold you accountable for paying some amount of self-employment tax. 

 

That sucks, right? But the good news is there is a way to avoid this self-employment tax, which brings us to scenario 2. 

 

Scenario #2: LLC as an S Corp

 

For this scenario, you either have or will need to register your business as an LLC. (Check out my post HERE to learn how to do that.) When you fill out the form to register as an LLC, you will have the option to elect your business as an S Corp. You need to check yes to that option! This S Corp election will help you be taxed differently.

 

There are some requirements you need to follow if you elect this option. For instance, you have to run payroll. This is a non-negotiable. I recommend using Gusto. I use it and several of my clients use it! Check it out HERE. 

 

Through payroll, you will pay yourself a “reasonable salary.” You may wonder what a reasonable salary would be. This is something you can talk to your CPA about and consider how much time you’re putting into the business, the type of industry you’re in, where you live, etc. This is important because you want to make sure you can defend this reasoning if you have to.

 

After giving yourself a reasonable salary, the rest of the business income will be given to you as a dividend. Here’s the kicker: no self-employment tax! That is how you are going to save money as taxes.

 

If you choose to switch to this S Corp option, make sure you are making ENOUGH money for this to be a wise decision. Look at the tax bracket you’re in, how much money your spouse makes, and things like that to help you determine if you will actually save money as an S Corp.

 

Pro Tip: Usually, if you are making around $50k per year, that’s when you start raising the question if it’s time to switch to an S Corp. 

 

 

 

How to Get Paid the Most as an LLC or S Corp

 

Alright, I hope these rules and tips helped you to know how to get paid the most as an LLC or S Corp. When you avoid extra taxes, that is more money in your pocket! It can be tricky to handle all this legal language, so make sure to either reach out to your attorney or if you don’t have one, you can reach out to me and I’d love to help! Follow me on Instagram @brittanyratelle to keep getting the best tips on how to make your business legally legit. 

 

 

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