Great news! As a single member LLC, this is so easy to do – simply write yourself a check (or via electronic transfer) and charge it to Owner’s Draw from your business account.
As a single member LLC you are not an employee of the company, but an owner so therefore you do not need to partner with a payroll service and worry about withholdings.
This is because, in the eyes of the IRS, single-member LLCs are considered a disregarded entity.
What exactly is a disregarded entity?
Basically, the IRS considers you, single member LLC owner, a sole proprietor. To explain further, your business’ profit (or loss) flows over to your personal tax return (via a Schedule C). The beauty of this is as you pay yourself you are not worrying about payroll, tax withholdings– you are just withdrawing from the company’s equity. Additionally, when you make periodic owners draws throughout the year, you are essentially taking profit distributions sooner than year end when profit distributions are typically made.
In the most basic terms, owner’s draws made earlier in the year is an advance payment of expected year-end profits.
What’s important to mention is when you withdraw from the company’s equity, this is captured on your Balance Sheet and will not appear on your Profit and Loss Report.
Why is this important?
Because Profit and Loss is a report that takes your Revenue and minus Expenses. As an owner, you are drawing from owner’s draw which is an Equity Account (that appears on your Balance Sheet). Therefore, your owner’s draw will not change your Profit and Loss Statement’s Bottom Line. The owner’s draws you make will show as decrease on the Equity on the Balance Sheet, but come year end close out, profits made will increase that capital account (also known as Retained Earnings).
But keep in mind, if you are making owner’s draws, you could impact your Cash Flow.
When I talk with prospective clients, the #1 thing they mention is this, “I’m profitable, but I have no cash.” This statement tells me that they are making owner’s draws and not factoring those draws into their statement of cash flows OR they have high Accounts Receivables (A/R) and need to follow-up with clients to get the A/R level down and thus improve their cash flow.
But I digress– back to the question: How do you pay yourself?
Again, simply write a check (or electronic transfer) to yourself and post this withdraw to Owner’s Draw.
But, what about my tax liability?
Another great question.
So as we clarified above, you, single member LLC, are not a W-2 employee.
Instead, your tax withholdings are made via tax installment payments (typically this is done quarterly) to the IRS (federal) and your home state (in my case, it would be NY).
To file a quarterly estimated payment with the IRS, use Form 1040-ES. Here is the link: https://www.irs.gov/pub/irs-pdf/f1040es.pdf
To file a quarterly estimate payment with New York State, use Form IT-2105. Payments can be made online, but here is the link to a voucher form: https://www.tax.ny.gov/pdf/current_forms/it/it2105_fill_in.pdf
How much do I save?
I recommend to my clients with under $250K in annual revenue to set aside approximately 15% of their owner’s draw to cover their tax liability. I further recommend that they open a separate account so in between installment payments they have money saved to cover their tax liability.
Thanks for reading. Please keep in mind that The Wellness Bookkeeper, LLC and the information contained herein is not intended to be a source of advice with respect to the material presented, and the information and/or documents contained in this website do not constitute legal advice and is not be held liable.