You may have heard the word “distributions” mentioned if you operate a business, particularly one with an LLC. A distribution is essentially a payment paid from the company’s income to the owner or owners of an LLC. What does that entail, though, in terms of income and taxes? Do distributions count as money?
The simplest response is that distributions are not seen as income. Distributions are not subject to payroll taxes like Social Security and Medicare like a regular income or wage is. This is due to the fact that dividends are viewed as an investment return rather than pay for services rendered.
So, if dividends aren’t regarded as income, how do you fund your LLC so that you may pay yourself? The solution is in the way your company is set up. If your LLC just has one member, you can easily move money as needed from your business account to your personal account. However, you must adhere to the rules established in your LLC operating agreement if you have more than one member.
You must have enough revenue coming in to your LLC to be able to distribute it. You must be aware that you cannot get dividends in excess of the earnings the business has generated. Furthermore, a member’s ability to receive distributions from an LLC may be limited in terms of both timing and amount.
Why therefore, do distributions escape taxation? The reason for this is that an LLC’s profits are regarded as “pass-through” revenue. This indicates that only individual members are taxed on the profits, which are passed down to them. The gains are essentially only subject to a single tax at the member’s personal income tax rate. For this reason, payroll taxes and self-employment taxes are not applied to distributions.
Finally, you might be asking whether distributions from an LLC are taxed. Yes, they are, is the response. Draws are exempt from payroll taxes but are effectively the same as payouts. They are still regarded as pass-through income, though, and are subject to personal taxation.
In conclusion, distributions are not taxable as wages and are not regarded as income. They are a method for LLC owners to get a return on their investment from the company’s earnings. It’s crucial to adhere to the rules set forth in your LLC operating agreement and to only take distributions that are consistent with the amount of profits the company has generated.