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Tax question: How is a business owner taxed on draws?
Posted on 10/9/15 at 4:36 pm
Posted on 10/9/15 at 4:36 pm
Info: Co-owners of LLC
One owner drawing some money every know and then. Max year end total draw around $2500
How is this money going to be taxed?
Good idea to draw or should this be a paycheck like to other employees?
One owner drawing some money every know and then. Max year end total draw around $2500
How is this money going to be taxed?
Good idea to draw or should this be a paycheck like to other employees?
1
Posted on 10/9/15 at 4:55 pm to Taurus
Partnership LLC?
Posted on 10/9/15 at 5:05 pm to Taurus
So I'll preface and say I'm not a tax professional by any means, and that I could be wrong here.
That being said, if I recall correctly if it's a Partnership LLC you should be getting taxed already on your ownership percentage of the LLC's profit and loss (Through a K-1 form). Since you are already taxed on that, your deductions from that basis are nontaxable (If I remember the analogy I was given is it's similar to a sole proprietorship, you're taxed on the whole earnings of the business, so what you draw as your "salary" isn't taxed).
I'm also assuming by draws you don't mean a guaranteed payment or salary, which would be different.
That being said, if I recall correctly if it's a Partnership LLC you should be getting taxed already on your ownership percentage of the LLC's profit and loss (Through a K-1 form). Since you are already taxed on that, your deductions from that basis are nontaxable (If I remember the analogy I was given is it's similar to a sole proprietorship, you're taxed on the whole earnings of the business, so what you draw as your "salary" isn't taxed).
I'm also assuming by draws you don't mean a guaranteed payment or salary, which would be different.
Posted on 10/9/15 at 5:07 pm to Taurus
I don't think you can receive wages unless you elect to be taxed as an s-corp or c-corp. All income is passed through to each members personal returns otherwise.
Posted on 10/9/15 at 5:15 pm to TigerinOkieHell
quote:
I'm also assuming by draws you don't mean a guaranteed payment or salary, which would be different.
Yes, but my understanding the number of draws and amount is irrelevant.
I also thought draws were not taxed, but have been told they will be via 1099 at the end of the year.
I argued that is double taxation.
I have a friend who owns a business and his CPA says he must take a salary and can't make any draws and he is the sole owner.
My CPA says I'm good, but my friends CPA says no.
Now I'm freaking confused.
Posted on 10/9/15 at 5:44 pm to Taurus
My understanding was that entity income/loss was taxed, and that drawing from your basis only reduced it. Apart from that only salary/guaranteed payments would be taxed. However I'm no tax CPA, so again my understanding is limited. If you have a good CPA working for you though and he has all of your information I would trust him. Your friend's situation might be different since he is the sole owner. In that case he gets treated as a sole proprietorship and not a partnership.
This post was edited on 10/9/15 at 5:45 pm
Posted on 10/10/15 at 10:50 pm to Taurus
Distributions (Draws) will not be taxable unless the amount exceeds your basis in the partnership. You are paying tax on your share of the partnership's income whether it gets distributed to you or not......so actually distributing that income is not a taxable event. The distributions should be reported on your K-1, not on a 1099.
I say this assuming that (1) you are a partner and (2) these are actually distributions and not some form of compensation.
I say this assuming that (1) you are a partner and (2) these are actually distributions and not some form of compensation.
Posted on 10/11/15 at 1:34 pm to Taurus
Are you actually doing work in this business? Or are you just an investor?
A partner in a partnership should never receive a W-2 or a 1099. It happens sometimes, but it's not supposed to.
A partner is taxed on the share of income and loss allocated to him/her.
Draws (technically called distributions) are not deductible by the business and not taxable income to the partner.
Guaranteed paymente are different. These are essentially payments to a partner for services rendered. They ARE deductible by the partnership and ARE taxable income to the partner. They are also generally self-employment income to the partner.
Is your friend's business set up as a C Corporation or an S Corporation? If it is, he should take a salary. If it's an S corp, he can also take distributions.
A partner in a partnership should never receive a W-2 or a 1099. It happens sometimes, but it's not supposed to.
A partner is taxed on the share of income and loss allocated to him/her.
Draws (technically called distributions) are not deductible by the business and not taxable income to the partner.
Guaranteed paymente are different. These are essentially payments to a partner for services rendered. They ARE deductible by the partnership and ARE taxable income to the partner. They are also generally self-employment income to the partner.
quote:
I have a friend who owns a business and his CPA says he must take a salary and can't make any draws and he is the sole owner.
Is your friend's business set up as a C Corporation or an S Corporation? If it is, he should take a salary. If it's an S corp, he can also take distributions.
Posted on 10/11/15 at 6:53 pm to LSUFanHouston
quote:
Are you actually doing work in this business? Or are you just an investor?
Doing work.
quote:
Guaranteed paymente are different. These are essentially payments to a partner for services rendered. They ARE deductible by the partnership and ARE taxable income to the partner. They are also generally self-employment income to the partner.
I guess that is what is confusing to me. I don't see much difference of distributions or guaranteed payments unless it's defined for specific tax purposes.
And I see taking distributions the better option.
Basically this is a start up that is beginning to see profits. I also earn a paycheck from a different company and I want to make some distributions from my business without it being a paycheck.
It's nothing guaranteed right now for sure. So, on good weeks or months just make owners draws.
I want to make sure I ain't screwing myself either way and I don't want the IRS after my arse.
quote:
Is your friend's business set up as a C Corporation or an S Corporation? If it is, he should take a salary. If it's an S corp, he can also take distributions.
LLC, but maybe it's a S corporation. Not sure. Are LLCs set up as S corporations?
Posted on 10/11/15 at 11:36 pm to Taurus
Llc's can be taxed as s corps. But you need to have a competitive salary and all owners must take an equal distribution if you are going to take one.
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