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Old 19th October 2011, 08:48 PM   #1
james114
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Default LLC Tax Questions

I recently took over a franchise with a partner.I formulated an LLC and we have put ourselves on payroll. We want to lower our pay so we can save ourselves from having to pay alot in employer tax.My question is if we pay ourselves $100 a week and we take out $500 a week from our business account will we be taxed on that $500 at the end of the year?What do we claim it as?

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Old 20th October 2011, 04:14 PM   #2
ChrissyBiz
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Good question, and since I could not find anything on irs.gov -- this is what I found: http://community.intuit.com/posts/ow...able-in-an-llc

Hope it helps!

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Old 20th October 2011, 05:16 PM   #3
ArcSine
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As a co-owner of an LLC, you shouldn't be on the payroll. Although, as a commentator noted in that link Chrissy provided, the end-of-the-day difference is usually negligible, and I'm not really sure what remedy IRS would pursue to correct the matter if it came to their attention.

As a side note, by putting yourselves on the payroll, you're incurring some federal and (probably) state-level unemployment taxes to which draws would not be subject.

Instead of taking a $100 paycheck and a $500 draw, you should be taking a $600 draw each week.

You and your partner will each be taxed on your respective shares of the partnership's net profit, regardless of how much you withdraw. The other side of that same coin is that your $600 draws are not taxable income to you, in most common circumstances.

Suppose for example your LLC has a bottom line profit of 70,000 for a particular year. Suppose also that you are a 50% owner of the biz, entitled to half of the profits. In such case you'll report 35,000 on your personal return as income, irrespective of how much cash you withdrew from the company during the year in the form of draws. You would not additionally report any draws as income, though, since they're just considered a payout from the 35K which you're already reporting anyway.

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Old 30th October 2011, 11:29 AM   #4
phanio
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As a LLC - all revenue and expenses flow through to you and the other members - regardless of however much you put in your pocket.
If you set up the LLC as a 50% partnership that means that 50% of all net revenues flow to you personally regardless if you actually take the money out.
You want to reduce taxes then find ways to lower your net revenues like making more business purchases.
Taking less out of the business will do nothing to lessen your personal tax burden.

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Old 11th May 2012, 05:22 PM   #5
Ryanloop
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It depends on how you set-it up.

Each owner of an LLC (taxed as a partnership) will get a K-1 reporting his or her income or loss for the year which will then go onto the 1040.

If a draw is taken it is not taxed in addition to the income on the K-1 if the person taking the draw had enough basis to take the draw. Basis is created through investments into the business plus profits and reduced by draws and losses in the business. If the draw is in excess of basis the excess amount will be taxed.

Also, if the draw is for compensation it will be considered a Guaranteed Payment and will be recorded as income on the K-1.

Technically owners of an LLC should not take W-2 wages throughout the year. Although it is a common practice and at the end of the day the tax paid is the same.

Is the mud any clearer? Partnership taxation can be complicated and confusing. If you have any questions it is well worth consulting a CPA to make sure you are doing it correct


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Old 4th June 2012, 09:03 PM   #6
SeattleCPA
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Default Subchapter S LLC

In order to avoid self-employment taxes or payroll taxes on your share of the LLC's income, you can either make an S election (using a form 2553)... and sometimes (per convention) you can have the operating agreement re-written so that some of the share of LLC profit is treated as something other than self-employment earnings.

It's a been a long time since I've hung around here, so I won't post this as a real link but the address shown below gets you to a long-ish article at my site that describes the rules:

www dot llcsexplained dot com slash llcsexplained-taxation.htm

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Old 18th September 2012, 04:53 PM   #7
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yeah if your a partner in the LLC you shouldn't be on payroll, I was pretty sure by default if there are 2 people as members of an LLC than it's default tax classification is partnership, unless you have changed that I wouldn't be on the payroll as an "employee".

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