Tax Advice For Single Member LLC Compensation

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Tax Advice For Single Member LLC Compensation

By The BIDaWIZ Team - January 11, 2010 Share:

Business owners that setup a single member LLC often have questions as to how much they should pay themselves in salary and dividends. The answer to the question depends on the type of LLC that is setup. Keep in mind that as a single member LLC your business can be classified as either a disregarded entity or corporation for tax purposes.
	Classified as a Disregarded Entity? As a disregarded entity you are treated as a sole proprietorship in which you report income and expenses on Schedule C of your 1040 personal tax return. Therefore, the earnings you receive are taxed at personal income and self-employment tax rates. The issue of how much salary and dividends you should pay yourself is not applicable for this entity. Classified as a Corporation? If the single member LLC is treated as a C Corporation then, yes, reasonable salary limits would apply. But, in this case the IRS puts a limit on paying too much salary since it is a tax deduction before the corporate income tax is imposed. Dividends on the other hand are paid after corporate profits.
What About S Corporations? In an S Corporation, if the corporate officers are being compensated with an unreasonably low salary to avoid paying employment taxes (such as FICA) and instead paying out large distributions, that is an immediate red flag and could prompt an audit. A lot of S corps get flagged for audits if the corporate officers have little to no wages. We have written about this topic which you should read if you haven't already. Tax advice for S Corporation Compensation.
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