If you’re a husband and wife who own an LLC, you may be wondering how to pay yourselves. There are a few different ways to do this, and the best option for you will depend on your specific circumstances.

Option One

One option is to pay yourselves a salary. This is the most common way to pay yourself, and it’s relatively straightforward. You’ll need to determine how much you want to pay yourself, and then you’ll need to withhold income taxes and payroll taxes.

Option Two

Another option is to pay yourself a draw. A draw is a payment that you take from the profits of your business. You don’t have to withhold income taxes or payroll taxes on a draw, but you will need to pay them when you file your taxes.

Option Three

Finally, you can also pay yourself a combination of salary and draw. This may be the best option if you want to take some money out of your business now, but you also want to save some money for taxes.

No matter which option you choose, it’s important to keep track of your income and expenses. This will help you to make sure that you’re paying yourself the correct amount, and it will also help you to file your taxes correctly.

Tips for Maximizing Profits

Set a Salary That Is Fair to Both Spouses

You should consider both spouses’ contributions to the business when setting salaries.

Pay Yourself a Draw Only When Necessary

Only take a draw from the profits of your business when you need the money.

Keep Track of Your Income and Expenses

This will help you to make sure that you’re paying yourself the correct amount, and it will also help you to file your taxes correctly.

Consult with a Tax Advisor

A tax advisor can help you to choose the best way to pay yourself and to file your taxes correctly.

Additional Considerations 

State laws

The laws governing how you can pay yourself in an LLC vary from state to state. Be sure to check with your state’s secretary of state’s office to find out what the requirements are in your state.

Tax Implications

There are different tax implications for paying yourself a salary versus a draw. Be sure to consult with a tax advisor to understand the tax implications of your chosen payment method.

Equity

If you are paying yourself a salary, you will need to make sure that you are paying yourself a fair wage. You should also consider how your salary payments will affect the equity in your business.

Disagreements

If you and your spouse disagree about how to pay yourselves, it is important to have a clear agreement in place. This agreement should be written down and should be signed by both spouses.

Video Transcript

My wife and I started an LLC. Can we pay ourselves without starting an entire payroll system? We have heard of the owner draws, but that really doesn’t help when we need to prove income amounts.

So I think I would rephrase the question like this. When an LLC is owned by a husband and wife, how does the LLC pay them without starting a formal payroll system?

So the short answer is you can simply write yourself a check from the LLC to your personal checking account. So the check would be from the LLC and say to Mary Smith, $1,000, and then in the memo line, you could put profit distribution.

Let’s break this apart, though, cause there are a lot of different pieces here. So first, this whole idea of profit distribution. When an LLC generates profits, the owner is entitled to those profits. So the profits can be sent to the owner simply by writing a check.

You might say, “Can I do a bank account-to-bank account transfer?” Sure, that is not a problem. When that thousand dollars comes into Mary’s account, it is her money. She has been paid it. It is a profit distribution. What you might know of as a dividend when it relates to a corporation and Mary can do with it whatever she wants.

Now that is personal money, but I would caution you that Mary is going to owe significant taxes on that. She is going to owe both income tax because it was income to her. In legal terms, it is called ordinary income. She is also going to owe self-employment tax, which is about 15%.

What is self-employment tax, you might be asking? When a company pays an employee, the employee looks on their pay stub and they see that about 7.5% of their wages are set aside or held. And then what you may not know is the company also pays about 7.5% to the government. And we call those two amounts payroll tax. So the employee’s portion is 7.5%, and the employer’s portion is 7.5% roughly. So a total of 15%. We call that payroll tax. The employer sends that to the government.

Well, as you know, when you are working for your own LLC, you are both the employer and the employee. So you have to pay that full 15%. But the government uses a little different term for it. Instead of calling it payroll tax, they call it self-employment tax. It is essentially the same thing. So just keep in mind that whenever you pay yourself, 15% is coming out for self-employment tax. Then you have state income tax and federal income tax.

So, as a rule of thumb, if you want to be safe, set aside half of the money that your LLC pays you for taxes. So if you get $1,000, set aside $500 of it for taxes, you can put that in a separate account or you can just save it until the end of the year.

If you have questions on this, CPAs are the most knowledgeable in this area, and they can guide you on the best way to handle this for your circumstances.

So, Can You Do All of This Without a Payroll System?

Absolutely. You don’t need to set up regular payroll for a husband and wife to own a business themselves and pay themselves.

I would encourage you to consider setting up an S corporation so that you can save money on payroll tax. I have a separate video on that. I would also encourage you to consider having the business owned by one of you instead of both of you. And here is why. Generally, an LLC is considered a marital asset if people get divorced, and the vast majority of the times, that LLC is split 50-50, or one person buys the other out in case of a divorce. So you don’t really have to be worried about divorce when it comes to joint ownership of a business. In other words, there isn’t a benefit in divorce by having the LLC owned by two people. And there generally isn’t any other benefit by having the LLC owned by two people. It is better to have it owned by one person because there are less taxes to deal with at the end of the year. Now they might still be employees of the company, but having a single owner usually results in less legal work and less tax preparation expenses at the end of the year.

Who Should Own the LLC?

So I almost always recommend that my clients have their LLC owned by either the husband or the wife. Now you might say, how do you decide which one? First, I ask, is there a benefit to being a woman-owned business? Like, are you seeking government contracts or some other government program that would benefit a woman-owned business? Then it should be owned by the wife. Otherwise, I say, have the business owned by whoever is actually signing most of the documents and running the business, kind of, whoever is serving as the president. That might be the husband, might be the wife. But it makes sense to just have the owner be the same one as the person who is running the company because then you don’t have to get into issues involving who makes a decision, the president or the owner. If you have any follow-up questions on that, feel free to submit them.

Conclusion

That does it for today. I would love to know if you find this helpful. And by the way, if you have other questions, feel free to add them in the comment section below. We will grab those and use those for future live sessions. You can also submit questions by email or using the form in the description below.

I am Aaron Hall, an attorney for business owners and entrepreneurial companies. This has been an educational broadcast. As always, all these issues I encourage you to use as topics to discuss with your attorney, not as a replacement for an attorney. This is educational information to empower you to avoid problems, establish a great company and hopefully have a better life You can find more about me at aaronhall.com.