Double taxed by paying yourself through LLC?

Question

When you pay yourself through your LLC do you end up getting taxed twice?

(first time for LLC earning the money, through rent for example, then the second time when you pay yourself a salary)

I feel like there should be a way around this but I may be not understanding how it works.

Thanks in advance!

Michael Plaks · Answer

I'm quite shocked that LegalZoom would publish such garbage, and authored by an attorney, no less. Wow.

There is NO double taxation.

When your LLC makes money, from rents or otherwise, that entire income is taxed to you. The mechanics can vary, depending on whether this LLC is treated as a disregarded entity, a partnership or an S-corp, however it ends up taxed to you in all these cases.

Important to understand: this income is taxed to you REGARDLESS of what happens with the money. It can be reinvested by the LLC, it can stay in the LLC account, or it can be pulled out by you, in full or in part. None of that matters for taxes, because the income is taxed when earned.

So, once your LLC made money, you're free to "pay yourself" by pulling the money out of your LLC. By that time, the taxes have already been triggered, and any transfer of money from the LLC to you ("paying yourself") has no meaning for taxes.

From here, you can complicate things if your life is too simple and too stress-free.

You can treat yourself as an employee and start formally paying yourself, with paychecks and all that. The payroll will be a deduction for the LLC and income to you. Sounds like a wash, right? It is not a wash, however. It actually creates more taxes for you, due to payroll taxes (Social Security and Medicare) - so you lose in this game. This setup is sometimes justified and sometimes even necessary, but it is rather rare and is always complicated. Not something you should try at home without professional advice.

I'm appalled that the LegalZoom attorney would imply that this is a common setup. Keep it simple.

Eamonn McElroy · Answer

@Joe T.

The article you linked is spreading misinformation.  It's wildly incorrect and will set taxpayers up to make serious mistakes who rely on it.

An LLC is like a chameleon in that it can be taxed as a Disregarded Entity (aka a Sole Proprietorship/Branch), a Partnership, an S Corp, or a C Corp depending on the ownership makeup and elections made.

Only knowing that you have an LLC without knowing further details doesn't help because advice can't be dialed in.

The default federal tax classification of a single-member LLC (SMLLC) owned by an individual is a Disregarded Entity (DRE).  DREs cannot pay their owners wages/salary as they are not considered employees.

Only S Corps and C Corps can pay their owners a wage or salary.

C Corps are the only one of these entities which have "double taxation" in the traditional sense of the word, which means both entity level tax and tax on extraction of capital (via dividends).

Disregarded entities do not.

Multimember LLCs (MMLLCs) taxed as partnerships also cannot pay their owners a wage/salary as owners cannot be employees for federal income tax purposes.

The article also suggests you can choose between employee and independent contractor classification.  The IRS has issued guidance on classification.  It's based on facts and circumstances, not whim.

Ashish Acharya · Answer

You don’t pay yourself a salary from an LLC.

The money that LLC owns in its bank account is already taxed in the year it is earned. When you take out money from LLC’s bank account it’s distribution and distribution is not taxed again.

This is what’s called a pass-through entity. You pay taxes on it earning  when it’s earned. And you can take out that already taxed money whenever you want without double taxation.

Account Closed · Answer

You need to talk to your cpa to get you on the right page.

A LLC is a pass thru entity, meaning it’s YOU, but it’s YOU in the sense of

“I don’t want you to know who I am LLC” or I have millions in my own name or other entities and don’t want to lose my shirt if some tenant sued me and I lost.

Michael Plaks · Answer

Thanks. I believe that all tax accountants on this forum, including the two of us, work nationwide.

Dalton Dellinger · Answer

@Joe T. I am currently working with a CPA in Evansville, IN. I will gladly recommend her if you shoot me a message!

Joe T. · Answer

You guys are awesome and thanks for the advice.

@Michael Plaks @Eamonn McElroy - Do either of you do tax accounting for Indiana investors? Or do you know of anyone who does?

Joe T. · Answer

@Ashish Acharya

See this page:

https://www.legalzoom.com/articles/how-to-pay-your...

"If you are the only member of the LLC, you will pay income tax on your distributions and you will file Schedule C to report the profits and losses of the LLC with your personal tax return."

Does that mean that you pay income tax on the distributions, but your LLC won't have to pay tax on that amount since it is not profit?

Would it be better to keep the money with the LLC since businesses are taxed at a lower rate?

Thanks for the response.

Double taxed by paying yourself through LLC?

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