I formed a single-member LLC earlier this year and just started taking money out. My accountant says since I'm a disregarded entity, I can just transfer money to my personal account whenever, no payroll needed. But it feels weird just moving money and calling it a day. How do you track it? Do you just keep a spreadsheet? I don't want to mess up my taxes.
LLC Taxes
Paying myself from a single-member LLC still feels strange
Spreadsheet is fine. Owner's draw, not salary. Just don't call it payroll and you're good.
I use a separate business checking and only transfer to personal once a month. Makes it easy to see what's left for expenses. QuickBooks Simple Start also has a 'owner's draw' category if you want something less manual.
Wait, you guys are making money?
Ha, barely. But enough that I don't want to explain a mess to the IRS.
It does feel weird at first. I kept a separate savings account and called it 'tax reserve.' Every time I paid myself, I moved 25-30% there. At the end of the year the tax bill didnt sting as much. That's the part people forget, not the draws themselves.
This is the real answer. The transfer is legal and boring; the tax reserve is what keeps you out of trouble.
Owner's draws are not taxable events. You pay tax on net profit regardless of whether you transfer it. So paying yourself is basically just moving your own money. Feels weird because it is weird. But that's the system.
also don't do what I did year one: I transferred 'payments' every week and labeled them 'salary' in my bank memo. My bookkeeper had to untangle it. Just label them owner draw.
OK so the consensus is: separate account, owner draw label, tax reserve, don't say salary. That's way less scary than I was making it. Thanks all.
One more thing: set a rule for yourself. I only transfer when my business account is above a set buffer amount. Keeps me from draining it, and then panicking when a software renewal hits.
The buffer thing is underrated. I also keep a running 'profit, so far' tab in the same sheet. Once a quarter I reconcile it against the bank balance and see if my brain and my account agree.
So basically business is just personal finance with extra steps and a scarier login screen.
And a form. Don't forget the form.
We don't talk about the form.
Real talk though, if you are ever considering an S-corp election later, the whole payroll thing changes. Then you actually do have to pay yourself a reasonable salary and run payroll. So enjoy the simplicity now. It's not not forever if you grow.