How do LLC Owners get paid and show Proof of Income?

Question

OUR LLC IS CLASSIFIED IN THE IRS' TERMS AS A PARTNERSHIP AND WE JUST OPENED THIS YEAR SELLING ONLINE. WE WANT TO START PAYING OURSELVES OUT BUT ARE NOT SURE HOW...WE HAVE ONE EMPLOYEE ALREADY WHO GETS PAID THROUGH QUICKBOOKS PAYROLL. I HAVE READ SOMETHING ABOUT OWNER'S DRAW, BUT AM NOT SURE IF I SHOULD BE PAYING MYSELF AND PARTNER THROUGH PAYROLL WITH TAXES TAKEN OUT OR JUST A REGULAR COMPANY CHECK...? ALSO, IF WE PAY OURSELVES WITH A COMPANY CHECK AND WAIT TO HAVE THE TAXES TAKEN OUT, HOW DO WE SHOW PROOF OF INCOME? ANY ADVICE WOULD BE SO GREATLY APPRECIATED, AS WE ARE BOTH IN OUR EARLY 20'S AND HONESTLY HAVE VERY LITTLE KNOWLEDGE ABOUT TAX ISSUES.

I meant, how do I show proof of income before I get my tax return - since we have only been in existence for less than a year, if I was going to purchase a house/car now, how would I prove the income?

Answer 1

Partners file a 1065. Income - Expenses = Earnings from Self-employment. This will flow through the 1040 schedule E and if your net earnings are more than $400, to the schedule SE to be taxed at 15.3%.

It is your personal responsibility to estimate the income and make quarterly estimated tax payments to the IRS/state.

Okay, it "eventually flows" to the schedule E.
The real hard part is the 1065 HAS to be filed. And under the new law, if you don't file it, the fine is now $86/mo per partner for up to 12 months. The same now goes for S-corps too.

Answer 2

To add to what the other respondents correctly stated, you generally prove your income with copies of your tax returns.

Getting credit when self-employed can be a bit difficult especially if your business is in its early years. Some lenders will do a "no doc" loan if your credit rating is very strong but those are becoming a bit more difficult to source during the current market meltdown. You will also pay premium rates for a no doc loan.

If your business has been trading for a while, a full set of audited financial statements from a CPA can help immensely in proving your income for credit purposes. That's a legitimate business expense and will be deducted on the Form 1065 Partnership return.

Answer 3

The Net Loss/Profit from the LLC does flow to the owner. An LLC is a flow through entity where it can not show a profit or loss, and it does go on the tax return of the owner(s), which are called Members on LLC's. To clarify the last part of your question, the LLC's net profit/loss is not necessarily the net profit/loss of the owner/member but it absolutely is part of it. The owner/member can have additional income, say from a W-2 Job or other LLC's or S-Corp's, etc.

Answer 4

Previous answer is incorrect. Partners income DOES NOT flow directly to schedule E. If first flows through Schedule K, Form 1065, and in turn to Schedule K-1. Each Partner recieves a K-1 and the K-1 income is reported on Form 1040 Schdule E, and then taxed at ordinary rates on form 1040

Answer 5

The above answers are pretty much correct accept that I doubt that a small business would pay thousands for an audit if they did not need it for significant business credit or some other purpose.

Many lenders will accept a letter from your accountant stating the amount of your monthly draws. If you don't have an accountant, you may be able to provide the lender with copies of the distributions you made out fo the LLC. Most lenders will want the business to have a 2 year or longer history.

Jim Kirby, CPA/PFS, CFP, CFS