If I am a single-member LLC, how do I pay myself?
As a single-member LLC you don’t get paid a salary or wages. You write a check or withdraw money from the LLC’s profits held in the business bank account. That transaction will be categorized as “Owner Draw”. No taxes are withheld from the payment.
The reason no taxes are withheld form the owner draw payment is a single-member LLCs is considered “Disregarded” entity for federal income tax purposes. That means the LLC is not a separate entity from the business owner. The business income, deductions (expenses), gains, losses and credits are reported on the member’s/ business owner’s income tax return Form 1040.
Depending on the type of business the information can be reported on either of three Schedules.
- Schedule C - Profit or Loss From Business
- Schedule E - Supplement Income and Loss (From rental real estate, royalties, partnerships, S corporations, etc.)
- Schedule F - Profit or Loss From Farming - used by qualified self-employed farmers
When and How do I pay my taxes?
Though Estimated tax payments which are used not only for federal income tax but other taxes such as self-employment.
- Federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year.
- Self-employment tax is a social security and medicare tax for those who work for themselves.
A single-member LLC member is considered self employed.
Estimated tax payments are divided into four payment periods and as a general rule the period are:
- Income earned during Jan 1 - Mar 31 - payment is due Apr 15
- Income earned during Apr 1 - May 31 - payment is due Jun 15*
- Income earned during Jun 1 - Aug 31 - payment is due Sep 15 *
- Income earned during Sep 1 - Dec 31 - payment is due Jan 15
(*) Note payments for second and third quarter are not the same as for quarterly payroll tax depositors.
How do I pay contractors?
Let’s first discuss who is considered an employee and who is not an employee under current IRS rules.
According to Publication 15 A - Employer’s Supplemental Tax Guide there is a business relationship between you and the person performing the services.
Services can be provided by:
- Common-law employee
- Statutory employee
- Statutory nonemployee
- Independent Contractor
Under common law a person who performs services for you is considered an employee if you control what will be done and how it will be done. These criteria apply even if your give the employee freedom of action. What matters is you have the right to control the details of how the services will be performed.
Under statues there are two categories. Statutory employees and Statutory nonemployees.
Statutory employees are considered employees for social security and medicare purposes. Examples of those employed at commission driver who deliver meat, vegetables, bakery products and beverages other than milk. Full time insurance sales people who sell full time for one insurance company. Traveling sales people who work full time for one firm getting orders from customers.
Statutory non employees are direct sellers, qualified real estate agents and certain companion sitters. These individuals are considered self-employed for federal income tax and employment taxes.
Independent contractors are people who work an independent trade, business or profession in which they offer their services to the public are generally not employees. The facts in each relationship can determine if that person is an independent contractor or employee.
The general rule is that you as the person receiving the services only has the right to control or direct the result of the work, not the means and methods used to accomplish the results.
An employer must generally withhold federal income taxes, withhold and pay social security and medicare taxes, pay unemployment taxes on wages paid to employees.
An employer doesn’t generally have to withhold or pay over any federal taxes on payments to independent contractors.
Before you engage and pay independent contractors we highly recommend that you have them complete USCIS Form I9 Verify Employment Eligibility and IRS Form W9 Request for Taxpayer Identification and Certification.
If you pay an independent contractor over $600 you are required to file Form 1099-NEC. You will need the information from these forms to accurately complete the information.
Once they have provided the forms and you are satisfied the information is accurate simply write a check payable to that individual.