Importance: Understanding how to pay yourself as an LLC owner is crucial to avoid common mistakes and manage taxes efficiently.
Goals: Learn how to pay yourself correctly and optimize for tax savings, especially by potentially transitioning to an S corporation.
Initial Steps
LLC Setup: Started as a personal fitness trainer and set up an LLC for liability reasons (Single Member LLC - SM LLC).
Startup Costs: You can deduct up to $5,000 in startup costs even if your business is not profitable yet. Expenses beyond $5,000 must be amortized over 10-15 years.
Ways to Pay Yourself
Distributions
Definition: Money taken from the business bank account to personal checking is a distribution.
Tax Implications: Tax-free at the time of distribution but taxed later. Not a tax deduction.
Example: Taking $30,000 from a $100,000 LLC's account leaves $70,000. However, taxable income remains $100,000.
Salary
Limits: As an LLC, you cannot pay yourself a salary unless you opt for S-corporation taxation.
Benefits: Pay yourself a W2 salary and complement with tax-free distributions.
Transition to an S Corporation
Benefits
Self-Employment Taxes: Switching reduces the self-employment tax burden.
Form 2553: Required to change tax status from LLC to S Corporation.
Example Scenario
LLC vs S Corp Taxation:
LLC: $100,000 total income faces 15.3% self-employment tax ($15,300).
S Corp: $100,000 income, $40,000 salary results in $6,120 self-employment tax, with notable tax savings.
Self-Employment Taxes Explained
Components: 15.3% total (Social Security 6.2% + Medicare 1.45% x 2 for employee and employer sides).
Calculation: $100,000 income pays $15,300 if all taxed; can reduce with S-corp structure.
Practical Pay Strategies
Distributions: 40% of profits taken as distribution (e.g., $40,000 from $100,000 profit).
Salary: Convert distributions to salary for tax benefits under S corp.
Advanced Planning and Events
Ongoing Education
Tax-Free Wealth Event: 5-day deep-dive into advanced tax strategies.
Topics: Mindset, entity structuring, deductions, income shifting, real estate tax strategies.
Special Courses: Bonus materials for early VIP sign-ups (e.g., children on payroll).
Conclusion
Key Takeaway: Properly structuring your pay and understanding tax implications can save significant amounts annually.
Next Steps: Consider transitioning to S corporation status and participate in further tax education events.
Diagrams/Examples
Utilize diagrams showing financial flow from LLC to personal accounts in both LLC-only and S-corp scenarios for clarity.