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On an LLC do partners draw a salary or should they be paid

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as an employee on W2. On...
On an LLC do partners draw a salary or should they be paid as an employee on W2.
On Corporations do partners, officers draw a salary or should they be paid as an employee on W2?
Submitted: 5 years ago.Category: Tax
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6/1/2012
Tax Professional: DanielleCPA, Certified Public Accountant (CPA) replied 5 years ago
DanielleCPA
DanielleCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 794
Experience: Years of Experience in Business & Personal Taxes
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Hi and welcome to Just Answer! I'm happy to help with your tax questions. Feel free to interject at any time if you need clarification.

LLC partners (known as members) cannot be paid as an employee on a W-2, assuming the LLC is treated as a partnership. LLC members must take their pay in the form of guaranteed payments.

Owners and officers of a Corporation salary should be paid as employees and reported on a W-2. Corporation owners may also take dividends in addition to their payroll.

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Customer reply replied 5 years ago

Wow! You must be in customer service, what a pleasant response!

So, of course this does bring another question.

On the LLC members should they receive set amounts like a salary? Should they send in quarterly withholding to cover their taxes and social security? Any items they pay for personal from the company these should then be considered Members Draw?

On the Corporation how would dividends benefit them?

Is the Corporation allowed to pay any personal expenses from the acccount or should the owner/officer pay these items from their own account after taking their salary?

Customer reply replied 5 years ago
Are you fqmiliar with this: I am a monthly fee payer on Just Answer. I pay $50.00 a month for unlimited questions. How would I go about also leaving a tip for an answer? Do the tips come out of the $50.00 I pay each month or are they above and beyond this fee?
Tax Professional: DanielleCPA, Certified Public Accountant (CPA) replied 5 years ago

LLC members generally should receive set amounts like a salary. Yes, they should send in quarterly estimates. Personal items paid for by the company should be considered a draw, which generally would not be taxable. Guaranteed payments are fully taxable.

Dividends would benefit a corporate owner because currently (through 2012) they are taxed at a lower income tax rate than W-2 wages. This provision is set to expire at the end of 2012. Also keep in mind that because dividends are a distribution of the accumulated earnings of the corporation, they are "double-taxed" since they have already been taxed once at the corporate level and are being taxed at a second time at the individual level. A corporation should not pay any personal expenses of the owner. Those should be paid after taking salary.

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Customer reply replied 5 years ago

So, if a member is taking $5000.00 a month for personal expenses should it be listed as guaranteed salary or draw or should the amount be split between the two? Is there a rule of thumb as to how much should be guaranteed salary compared to draw?

 

Tax Professional: DanielleCPA, Certified Public Accountant (CPA) replied 5 years ago

Guaranteed payments are meant to replace the salary that a partner is not allowed to take due to the business structure of the organization. I would say that $5,000 a month regularly is most likely guaranteed payments, but it all depends on the circumstances. Since draws can only be taken to the extent a partner has capital, there is no set formula.

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Customer reply replied 5 years ago
So in the case of personal expenses being taken from the business account this can only be a draw if the partner has capital invested? If not then these items would have to be considered Guaranteed payments. And guaranteed payments needs to be a consistent amount so it would be better if this partner took a flat monthly amount, put it in their personal checking account and paid their personal expenses from their personal checking account?
Tax Professional: DanielleCPA, Certified Public Accountant (CPA) replied 5 years ago

It is always cleanest for the partner to take a flat amount and deposit into their personal checking amount and then write any checks for personal expenses in there. Even for a draw, I would recommend a check to the partner rather than a check to cover the personal expense.

Draws cannot exceed a partners capital invested plus their share of accumulated earnings. That is their total "capital". Draws cannot exceed this amount for tax reasons. Since draws are not taxed (the share of partnership income was already taxed when earned), they cannot exceed the amount invested/already taxed - the partner's total capital account.

DanielleCPA
DanielleCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 794
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Tax Professional: DanielleCPA, Certified Public Accountant (CPA) replied 5 years ago
Hi,

Just wanted to follow up with you to make sure everything is going all right. Please let me know if you need anything else and feel free to request me in the future should you need any further help.

Thanks,

Danielle
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Customer reply replied 5 years ago
Thank you so much. I did as a matter of fact send a couple more questions to you regarding sales tax entries.
Tax Professional: DanielleCPA, Certified Public Accountant (CPA) replied 5 years ago

I saw that. Thanks!

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Customer reply replied 5 years ago
I will have one more in the morning on 1065.
Customer reply replied 5 years ago
On the 1065 one of the items I list is Members Draw. This then causes a loss for the year. The members draw will move to the K1 and then over tio the members personal tax return correct as income to the partner?
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