Business owners that setup a single member LLC frequently have questions as to how much they should pay themselves in salary and dividends.
The answer to the question depends on the type of single member LLC that is setup.
A single member LLC can be classified as either a disregarded entity or corporation for tax purposes.
Is Your Business Classified as a Disregarded Entity? A disregarded entity is treated as a sole proprietorship and therefore income and expenses are reported on Schedule C of your 1040 personal tax return.
Thus, your earnings are subject to personal income and self-employment tax rates.
The issue of how much salary and dividends you should pay yourself is not applicable for this entity.
Is Your Business Classified as a Corporation? If the single member LLC is treated as a C Corp then, yes, reasonable salary limits would apply.
But, in this case the IRS puts a limit on paying too much salary since it is a tax deduction before the corporate income tax is imposed.
Dividends on the other hand are paid after corporate profits.
What About S Corporations? In an S Corporation, if the corporate officers are being compensated with an unreasonably low salary to avoid paying employment taxes (such as FICA) and instead paying out large distributions, that is an immediate red flag and could prompt an audit.
A lot of S corps get flagged for audits if the corporate officers have little to no wages.
So really think this over if you have an S Corp and the salaries are unreasonably low.