Should I Pay Myself as a Manager?

[Grace Porritt]

I am trying to figure out the best way to take money out of my rental properties with the least amount of tax impact. I was thinking about paying myself 10% manager fee for each of my STR rentals and 5%/month on my longer term rental. Is this wise? Would it be better to just take an owner draw? FYI, I have an LLC.

[Jeff B.]

If you become your own employee, then there's W2, withholding, self employment - - - nasty tax consequences.  Instead, just stick with the Schedule-E would be a better choice is my gut reaction.

[William Morrison]

Picture not complete enough, but if it's active and not passive income you might be able to start a Solo 401k.  That might make the W2 issues worth it.
The limits are much higher than an IRA and the UBIT rules make make it worth while to look into as well. The Trustee vs Custodian issues are another thing to look at.

[Logan Allec]

"I was thinking about paying myself 10% manager fee for each of my STR rentals and 5%/month on my longer term rental. Is this wise?"

Not really.  If you pay someone to manage your properties, that's a deductible rental expense on Schedule E. So it will reduce your taxable income. However, that payment is also income to the person who received it.

If that person is you, then that money is taxable income to you, and not only is that money taxable income to you, but it's also subject to self-employment tax on Schedule C, unlike your Schedule E income. The fact pattern is the same if instead of "you", the recipient is "your single-member LLC" unless you elected to have the single-member LLC taxed as a corporation. However, you do escape the self-employment tax bit if the recipient is "your S corporation". Of course I'm assuming here that like most investors you are reporting your STR rental income on Schedule E and not on Schedule C as you would if you were the owner of a hotel, motel, etc.

There are some tax plays if you set up an S corporation to do your property management, but as there are administrative burdens to setting up an S corporation, it is only worth it if the investor's activities are substantial enough and only then in a specific set of circumstances, such as when the investor does not have any other sources of earned income and are therefore not eligible for certain tax tools that require the taxpayer to have earned income.  Retirement plans come to mind.

"Would it be better to just take an owner draw?"

Yep.  You pay tax on your rental income when you report it on your tax return as you do every year.  So you have already paid tax on your rental income.  From a tax perspective, there is no effect of taking an owner draw from the rental earnings sitting in your LLC's bank account.

However--and I'm saying this personally, not professionally as I am not an attorney and therefore not licensed to speak to legal matters--from a legal perspective, in all your dealings with the LLC, you must take care that you are not doing something that would give a creditor or legal opponent the opportunity to pierce the corporate veil and go after your personal assets. For example:

• The LLC should still be adequately capitalized after you take money out, meaning that it should still have enough money in its bank account to operate and potentially grow. If you take all the earnings out every month, it looks like you're treating the LLC's bank account just like a personal bank account, and you may be asking for trouble in a lawsuit.
• Personal and business funds should not be commingled.
• When you sign the LLC's checks (or any documents for that matter), you should be signing "on behalf of [name of LLC] by Grace Porritt, Member", not in a personal capacity.

I recommend you consult with a qualified asset protection attorney with respect to these legal matters.

[Steve Vaughan]

I've paid myself a mgt fee through my S-corp to fund my defined benefit retirement plan.  Without a specific purpose for the money, it's just a shell game with many potential tax problems, IMO.

[William Morrison]

Mine is a little like @Steve Vaughan 's situation but I have a Solo 401k via my S-Corp and rentals there too.  Although those cannot be managed by you in the same way.
Check limits, you might find it an option.

[Scott Levy]

I think @Logan Allec's response is spot on. If you have an LLC and want money from it, and it has been making money, you should just distribute the money to yourself and there are (generally) no taxes on it because you have already paid the taxes as the income was earned. There are some basis limitations and other considerations which may apply to your specific situation, but I think you'll end up paying more taxes by paying yourself a management fee.

[Grace Porritt]

Thanks for all of your feedback. I plan to learn more about the Solo 401K as a retirement/investment strategy. I have been taking owner draws up until now. I did not know anything about signing as a member of the LLC. Does this apply to EVERY check that I write?

[Justin Windham]

@Grace Porritt

It would apply to every check you write on behalf of the LLC. The importance of doing so seems to vary depending on whom you ask. If you had an attorney setup your LLC, that would be a great resource to ask for clarification on how you might want to go about signing for the LLC.