Q: How are owner draws from a LLC taxed?
A: The taxation of owner draws from a Limited Liability Company (LLC) depends on how the LLC is taxed by the Internal Revenue Service (IRS). An LLC can be taxed as a sole proprietorship, partnership, S corporation, or C corporation, and the tax treatment of owner draws will vary based on the chosen tax status.
If the LLC is taxed as a sole proprietorship or partnership, the owner’s draws are not subject to payroll taxes, such as Social Security and Medicare taxes. Instead, the owner will report the income and expenses of the LLC on their personal tax return using Schedule C (for a sole proprietorship) or Schedule E (for a partnership). The owner’s draws will be subject to federal income tax and any applicable state and local income taxes.
If the LLC is taxed as an S corporation, the owner’s draws are divided into two categories: salary and distributions. The owner must pay themselves a reasonable salary for the work they perform for the LLC, which is subject to payroll taxes. The remaining profits can be distributed to the owner as a non-payroll distribution, which is not subject to payroll taxes. However, the owner’s distributions are subject to federal income tax and any applicable state and local income taxes.
If the LLC is taxed as a C corporation, the owner’s draws are considered a dividend distribution and are subject to double taxation. The corporation must pay corporate income tax on its profits, and the owner must pay personal income tax on the dividends received. The owner’s dividends are also not subject to payroll taxes.
It’s important for LLC owners to work with a qualified tax professional to determine the best tax status for their LLC and to ensure they are complying with all tax laws and regulations.
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