How do my husband and I pay ourselves in an LLC

Question

Complete newbie here! My husband and I just started an LLC. We are each depositing the same amount as capital contribution so that our ownership is each 50%. My questions are: 1) How do we pay ourselves once we have money coming in? Is it based on our percentage we own? I know that I will need to cut us each a check for the same amount to keep it equal. 2) Does it matter how often: monthly, every other week? 3) When you pay yourself from profits, does it come out against the capital account? 4) Since we want to be taxed like a sole proprietor/partnership rather than a corporation, we don't have to pay ourselves with a W-2 and withhold taxes right? I have so much experience as a sole proprietor and now am completely confused and back at square one. I appreciate everyone's responses :)

Ashish Acharya · Answer

Unfortunately,  that is not correct.

There is no withholding or wages in what she is doing.

Also, we don’t know what she is doing, so 20% off is not certain either.

Michael Plaks · Answer

Account Closed

The answer to your question can be very simple or very complicated, depending on what your business is, how well it is going, your overall financials and your family's handling of money.

I'll give you the simple answer, which is based on these assumptions:

• you file a joint tax return
• your business is moderately profitable
• you both are working in this business, more or less equally
• there're no special circumstances making things more complicated

In this case, just like with you being a sole proprietor in the past, your taxes are incurred when the money comes into your company, not when you take it out. It really makes no difference for taxes whether you keep the money in the company business account, reinvest it into your business, take it out etc. Neither does it matter when, how often and how much you take out. The taxes will be the same.

So, you do not "pay yourself" any more than when you were a sole proprietor. You simply transfer money out of your business account into your personal joint account (or your separate accounts if you keep your money separate) - anytime and in any amounts. Preferably, do it in lump sums and relatively infrequently, but it's not a requirement, just a good practice. If your money is kept separate, then equal amounts to each of you.

This was the simple answer. There could be many layers of complexity on top of this, depending on the factors I mentioned in the beginning.

Lina Bibikov · Answer

@NICOLE KAUFMAN best to speak to CPA!

There is so many different ways to do things depending on your goals. Are you holding rentals or flipping? Do you want S-Corp election? How is your LLC structured?

Michael Plaks · Answer

Account Closed

That screen shot has nothing to do with RE Pro or this thread, for that matter. It has to do with the new 20% deduction, and wholesaling is not consulting. In other words, ignore this screen shot - you are NOT a "specified service" when asked by software.

As far as how your income is taxed, both wholesaling and rentals, at $400k profit it is critical to work with a tax planning specialist. Find one, there're 20+ of us here.

Michael Plaks · Answer

I would not say that JR's statement is not correct. I would say that it is not necessarily correct, or rather correct under some specific circumstances: if the business is "active" (as in wholesaling or flipping), if it is profitable, if it benefits from an S-corporation treatment and if such treatment is in fact elected.

In my earlier comment, I referred to a situation like this one as one of the possible complications.

Carl Fischer · Answer

Account Closed

Get a CPA to help you.  Who opened your LLC? Why did you open the LLC? Asset protection, taxation, cash flow, etc.

Michael Plaks · Answer

I guess you're not clear about the RE Pro. RE Pro status is only needed by landlords who have losses from rentals but cannot deduct theses losses - either because they have too much losses or too much income.

To qualify for RE Pro, there're several requirements, including requirements to spend a lot of hours in real estate business (750 a year) and spend more hours in real estate than in non-real-estate pursuits (like a W2 job). Amount of income is irrelevant.

If you're a full-time wholesaler and flipper, you probably qualify for RE Pro - assuming you even need to qualify, i.e. you have rentals with losses.

Account Closed · Answer

Sent you a PM.

Account Closed · Answer

You're right, I'm not clear. I thought I remembered that high income individuals were hit with higher taxes based on being "Service Providers" like this screen shot from some tax software. I am not W2, I do real estate full time. I would have thought that Wholesaling would fall into Consulting since a wholesaler doesn't take ownership and doesn't rehab the property and has the assignment for a very short period of time.

Have I misunderstood and that actually Wholesaling time counts toward the 750 hours needed or is someone who Wholesales and has multiple rentals not counted as a dealer? Or, am I confusing two different things? My rentals are all profitable. I'm just trying to understand if I treat wholesaling profits differently than I treat rental profits since my main income is from rentals. Do rentals show up on one form and does wholesaling show up on a different form?

Account Closed · Answer

If my LLC-1 nets $200,000 a year flipping and

my LLC-2 nets another $200,000 a year wholesaling -

Am I considered a RE Pro or am I providing a service? (wholesaling)

How do my husband and I pay ourselves in an LLC

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