You’ve built your business, and now the money is starting to roll in – congratulations! But here’s the question: How should you pay yourself as a single-member LLC owner?
Getting this right is crucial for keeping your books clean, avoiding tax issues, and ensuring long-term business success. Let’s break it down so you can confidently pay yourself the right way.
What Is a Single-Member LLC?
A Single-Member LLC (Limited Liability Company) is a popular business structure (and the one I recommend) for solopreneurs because it combines liability protection with simplified taxation.
💡 Key Facts:
- Your LLC’s income and expenses are reported on your personal tax return.
- You’ll use Form 1040 with either Schedule C (business income) or Schedule E (rental income) for reporting.
- Legally, your business is separate from you, but for tax purposes, it’s treated as a “disregarded entity.”
Should a Single-Member LLC Owner Be on Payroll?
🚫 No! As a single-member LLC, you are not considered an employee of your business. This means you do not receive a salary or paycheck through payroll like a traditional employee.
Instead, you pay yourself through Owner’s Draws (or Distributions). Let’s dive into how that works.
How to Pay Yourself from a Single-Member LLC
Okay, now let’s talk about what steps you’ll want to take to ensure you pay yourself properly:
First: Open a Business Checking Account
- 🔹 Why? To separate personal and business finances (no commingling!)
- 🔹 How? Open a business checking account under your LLC’s name.
Second: Transfer Funds as “Owner’s Draws” (or Distributions)
- 🔹 What is an Owner’s Draw? A withdrawal of profits from your business.
- 🔹 How? Transfer money from your business account to your personal account.
- 🔹 Bookkeeping Tip: Record these transactions in QuickBooks Online under Owner’s Distributions (found in the Equity section).
Third: Do NOT Categorize as Payroll or Expenses
- 🔹 Owner’s distributions are NOT business expenses and do not reduce taxable income.
- 🔹 They won’t appear on your Profit & Loss Statement but will be reflected in the Cash Flow Statement under Financing Activities.
Tax Considerations for Single-Member LLCs
Even though you pay yourself through Owner’s Draws, your tax obligation is based on your net profit – not how much you withdraw.
📌 Taxes You’ll Owe:
- Self-Employment Tax: Covers Social Security & Medicare (about 15.3% of net profit).
- Income Tax: Your profits are taxed at your personal income tax rate.
- Estimated Taxes: Required quarterly tax payments to avoid IRS penalties.
💡 Pro Tip: Use QuickBooks Online to track transactions and set aside ~25-30% of profits for taxes.
FAQs: Paying Yourself as a Single-Member LLC Owner
Q: Can I pay myself a salary?
A: No. As an LLC owner, you cannot be an employee of your business. Instead, use Owner’s Draws.
Q: How much should I pay myself?
A: There’s no limit, but ensure you leave enough for business expenses & taxes.
Q: Do Owner’s Draws affect my taxes?
A: No. You’re taxed on business profits, not how much you withdraw.
Smart Financial Tips for LLC Owners
- ✅ Automate Your Bookkeeping: Use tools like QuickBooks Online to track income & expenses.
- ✅ Set Aside Money for Taxes: A good rule of thumb is to save 25-30% of your profits for taxes to avoid IRS penalties.
- ✅ Review Financial Reports Monthly: By monitoring your Profit & Loss Statement, Balance Sheet, and Cash Flow Statement you can decide how much to pay yourself each month without harming your business’s cash flow.
Why Properly Paying Yourself Matters
Paying yourself correctly isn’t just about transferring money – it’s about maintaining financial clarity, avoiding IRS penalties, and ensuring business success.
If you’re serious about getting your finances right, then you need a solid bookkeeping system.
📌 Next Steps: Master Your Finances with My QuickBooks Set Up Course! Want to streamline your bookkeeping and ensure financial success? Join my QuickBooks Setup Course for Solopreneurs today!
👉 Enroll Now and take control of your business finances!
Helpful External Resources
Final Thoughts
To summarize, by following these best practices, you’ll confidently pay yourself, keep your finances clean, and set your business up for long-term success. Have questions? Drop them in the comments below! 👇