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Distributions vs Salary?

Hi, 

I have a two member (me= 70% and other = 30%)  LLC in Maryland and have a net profit on 50k annually. We have no employees. Now since LLC is a pass though entity, i carry the profit to my personal taxes as per the K1. We dont take any salary from the company and everything stays there itself. 

My question is should i/we take a salary or distribution. Either one, we plan on taking around 40% of the gross profit. Do you recommend we do it as a salary or just take the distribution. We dont intend to take money so as not be able to pay the creditors. 

5 Answers

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  • ?
    Lv 6
    1 month ago

    Much of this growth has been due to avoidance of double taxation and lower individual tax rates. ... However, salary payments are subject to payroll tax. Classifying payments as distributions, on the other hand, doesn't reduce the business's taxable income, but most distributions are typically payroll-tax-free.

  • John
    Lv 6
    1 month ago

    Unless the LLC elected to be taxed as a C or S corporation, multi-member LLCs are taxed just like partnerships.  Partners cannot take a salary, so that option is out.  

  • Eva
    Lv 7
    1 month ago

    Since you are reporting as a partnership, you must take a distribution (draw) and not a salary.  Salary or a guaranteed payment to partner does not qualify for the QBI deduction on your personal return, so that is even more reason to do it as a distribution.  You are taxed on the net profit of your business REGARDLESS of what you withdraw from it.  Your withdrawals only affect the partner's capital accounts.

  • 1 month ago

    To take a salary, the LLC must elect to be taxed as a corporation.  The default for a multi-member LLC is being taxed as a partnership.

    So, assuming that you file a 1065 every year and are taxed as a partnership, you can not take a salary.

    If you elect to be taxed as a corporation then, you must take a salary.

    However, with only $50k in income split between two people, it is probably not worth going the corporation route.

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  • ?
    Lv 6
    1 month ago

    If you take it as a distribution then you lower your company will incur the tax liability    (an expense that lowers the taxes) AND the salary is a business expense...(also lowers taxes)

    It may be a was either way, but try getting a good tax software prep package and run the tax returns in both scenarios and see which one benefits you more.

    When you do that ...do not forget to run your PERSONAL tax scenario several different ways to see which one benefits YOU the most.

    Or you can ask your CPA.

    (CPA's cost more than Tax software...btw...)

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