How to pay taxes as a single member LLC

How to pay taxes with a single member LLC​

When it comes to taxes and the IRS, payroll can be confusing and downright intimidating at first, especially for new entrepreneurs.  But rest assured, paying yourself from a single member LLC is a lot easier than you might think.

What is a single member LLC?

Let’s start with a brief overview of what a single member LLC is.
 
A single member LLC (limited liability company) is a business structure allowed by state statue.
 
This biggest benefit of this structure compared to a sole proprietorship or partnership is that an LLC protects you from personal liability.   In a nutshell, it shields you from getting sued personally from potential liability issues arising during the course of business.   The liability instead falls on your business, shielding your personal assets.
 
LLCs can have more than one member or owner, but in this article, we are focusing on LLCs with one member.

What taxes are you liable for?

As a single member LLC, you will be responsible for paying both federal income taxes and self-employment taxes on your net income. 
 
Federal income taxes range from 10% to 37% in tax year 2022.  
 
In addition to federal income taxes, you must pay self-employment tax.
 
Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves.  The self-employment tax rate is 15.3%, which consists of two parts: 12.4% for social security and 2.9% for Medicare.  
 
You must pay the 12.4% Social Security tax on the first $147,000 of income in tax year 2022.  Amounts over that amount are not subject to further tax.  However, you must pay the 2.9% Medicare tax on all your net income.
 
Self-employment tax is like the Social Security and Medicare taxes withheld from traditional paychecks for W-2 employees.   As a traditional W-2 employee, the employer pays half (7.65%) and employee pays half (7.65%).  As a self-employed individual, you are responsible for paying the full 15.3%.
 
An additional 0.9% Medicare tax is due on income over $200,000 for single filers and $250,000 for joint filers.
 
Depending on your state, you may be liable for state income taxes as well.

Disregarded Entity

When it comes to taxes, a single member LLC is referred to as a disregarded entity by the IRS by default.
 
What does this mean?
 
A disregarded entity means that for federal tax purposes, your LLC will not be taxed as a separate entity.  Instead, your LLC will report income on your personal 1040 tax return.  This makes filing taxes a lot easier as you only need to file one return with the IRS.

Pay yourself with 4 easy steps

In order to pay yourself, follow these 4 steps.

Step 1:  Obtain an EIN from the IRS

When you form your LLC, you need to sign up for an Employer Identification Number with the IRS, which is referred to as an EIN.  An EIN is used by the IRS to identify a business entity, similar to a social security number.
 
You can apply for an EIN with the IRS for free here.

Step 2:  Register and pay estimated taxes with the IRS

After you obtain an EIN, you will need to register and pay estimated taxes with the IRS.  Estimated taxes are due each quarter on approximately January 15, April 15, June 15, and September 15.  
 
Estimated taxes are similar to withholdings from a traditional paycheck.  However, it eliminates the need for filing traditional payroll forms such as form 941, W-2, and W-4.
 
You can register by visiting this link to the IRS payment portal and filling out Form 1040-es to estimate the taxes you owe each quarter.  Remember that taxes are based on net income, which is revenue minus all your business deductions and expenses.
 
Once signed up, it is super easy to pay your taxes each quarter.  The IRS even has a mobile app to make paying easy.

Step 3:  Pay yourself

This is the easy part.  Either write yourself a check or transfer money from your business checking account to your personal checking account.  It’s a simple as that.
 
When recording the transaction in QuickBooks or another accounting software, remember to classify it as an owners draw or distribution.  Note that the amount you pay yourself is not deductible as an expense.

Step 4:  File your taxes at year end

When it comes time to file taxes at the end of the year, you will file form 1040.  There is no need to file an additional business tax return such as Form 1120 or 1120s for corporations, unless you make the special election to do so.  You can read more about taxation of s-corporations here.  
 
Instead of filling out the W-2 income section on your tax return, you will report the profit or loss from your business on Schedule C of the 1040 tax return.  Taxes are based on the net amount after all business deductions. 
 
And don’t forget to input the quarterly estimated taxes you paid during the course of the year.

Conclusion

A single member LLC is a great business structure for entrepreneurs and paying yourself is easier than it seems.  Just remember to follow these 4 steps:

1. Obtain an EIN
2. Register and pay estimated taxes with the IRS
3. Write yourself a paycheck
4. File a 1040 tax return at year end