LLC business and income question/taxes?

Question

If you have a LLC business and you own 100% share, and you take money from the profits of the business, is this not classed as income and have to declare this on your tax returns?
I am asking this as my friend's husband isn't declaring this and she is worried that she may get into trouble through her husbands deceit.
He is only declaring income when he pays himself, but not what he takes from the profits.
Is this legal?

Apparently he hasn't declared it on his personal/joint tax return. Only saying that he earnt $6,000 for the year which he paid himself as an employee.
She doesn't know where he is declaring all the money that he takes from the business profits. Eg: cash and paying personal bills from the business.
He files jointly, but she doesn't get to see the tax returns until after he filed them. She is worried. He also didn't get her signature for the joint returns which I told her she should have.

Let me get this clear...does that extra income from the business profits go onto his W2 too?

She said that whenever anyone asks him for a copy of his tax return (personal) it only shows income that he paid himself as an employee (w2). Nothing on there shows he actually receives income through profits.
He pays himself little money as an employee but takes loads of money through profits.
So anyone looking at this tax return (personal) thinks he is on low income. And doesn't know about the other income that really pays for personal bills and luxuries.
She knows they have a decent lifestyle and a good income through profits, but the tax returns show different. She is in a mess worrying about it.

Answer 1

An LLC is not a corporation unless they elect to be treated as one, so it's not going to pay out a dividend the way a corporation would.

(That's "limited liability company".)

Normally, an LLC will file an annual tax form for information purposes only, the same way a partnership files a 1065 and issues K-1 scheduals to the partners. Once per year, the LLC owners report their share of income on their 1040 even if they received no payments at all, and anything they draw out during the year is irrelavent as far as income.

The only way he would be required to report the draws as income is if he's reporting them as a deduction to the LLC, like he would if they were wages. An avoidance of tax to the one almost always triggers a taxable amount to the other and sometimes a penalty.

If he's paying himself with inventory, that's deductible as cost of goods sold, and he has to claim it as a taxable receipt.

If he transfers equipment to himself, he has to treat it as a disposal or sale by the company and mirror the event in his own taxes by either reporting it as income or adjusting his basis down to the company's basis.

If it's a cash withdrawal, and the LLC treats it as a non-deductible payment, then it's not taxable. If the company deducts it as a salary or as an expense for services, then he'll have to report it as wages or as business income and issue himself a W-2 or 1099.

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Edit added for your note:

If he's paying himself as an employee, then he has TWO amounts to report.

He reports his wages as if he were an employee, and he reports in addition to that his portion of the company profits (100%, since he's the only owner). The profits have already taken into account his wages, so it's not a double tax. He has to report both.

Answer 2

LLC's are a non-entity in the eyes of the IRS, but are generally filed on Form 1065 as a partnership. Partnership tax law is by far the craziest of all tax law. So...here's an example:

Joe owns Joe, LLC. Joe has one employee, Jim. Jim gets paid $100 per hour and Joe gets paid $250 per hour. During the year, Jim works 25 hours, and Joe works 30 hours.

The LLC's income statement looks like this:

Revenue: $100,000
Joe's Salary: $7,500
Jim's Salary (Joe's only employee) : $2,500
Other Misc Expenses $40,000
-----------------
Net Income $50,000

Joe is the 100% owner of the LLC, so he would normally have to passthrough all of the profits. However, Joe pays himself by "distribution" that has nothing to do with the hours he works the two payments of $25,000 during the 2006 tax year (Jan 1, 2006 to Dec 31, 2006 in this case).

The LLC prepares the two W-2's, sending Joe the W-2 for $7,500. The LLC then prepares the K-1, showing Ordinary Business Income of $50,000, but self-employment earnings of $0.

So yes, the income goes into Joe's tax return, but the self-employment income does not, saving Joe from the additional self-employment tax. This may be what your friend's husband is talking about.

If not, he probably claimed the $50,000 distribution as a "Guaranteed payment" for the use of capital or for services provided and this would (under the facts provided) almost surely not stand up in tax court.

Hope that helps.

Answer 3

An LLC is a pass-through entity. In a single-member LLC, ALL of the profit from the business goes straight to the owner's personal tax return. If it isn't claimed, the IRS will be looking for it.

Answer 4

When he does the taxes for the LLC, he should get a K-1 (like a W-2 because it adds to the income on the individual's taxes). The K-1 will tell him what he should and shouldn't claim.
She is at risk, so make sure they did a tax return for the LLC.

Answer 5

IRS and state enterprise do not trust taxpayers who artwork finished time interior of their organisation and don't take a payroll examine. if your organisation is audited this may be a huge concern in case you're actually not paid in accordance to what the industry might pay somebody doing the kind of artwork you're doing. The S-enterprise helps the internet income to bypass by using to the contributors who're paying income tax yet no self employment tax ( social risk-free practices) although this approach may be closed interior the close to destiny. added income may be paid ( dividend, capital benefit) to boot to wages.