LLC Member Draw Bookkeeping Question

by Angie
(Brentwood CA)

LLC Member Draw

LLC Member Draw

The owner of the LLC Corp draws his salary from the "Member Draw" GL.

The type of GL shows as an "Equity- gets closed."
i just want to confirm this is correct.

I also was curious for regular payroll with employee's taxes etc...

The portion the company is responsible for is automatically being coded to "cost of sales" which doesn't seem correct to me.

We do not have Sales per say in our company, we are a Consulting firm. But this was confusing me. What is the correct "Type" of GL for this?

Thank you, I eagerly await your response.

A Lehr

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Aug 24, 2023
Member Draws For LLC
by: BB

Certainly, A Lehr! Let's dive into your questions:

LLC Corp Owner Salary & Member Draw:
For an LLC, member draws are typically recorded as a reduction in the member's equity account. They aren't treated as an expense on the company's income statement, so recording it under "Equity" is indeed correct.

Employer Payroll Taxes:
The portion of payroll taxes that the company is responsible for should generally be recorded as an expense, not under "cost of sales." Since you're a consulting firm and don't have traditional sales, it would be more appropriate to categorize this under a general expense account like "Payroll Tax Expense" or "Employer Payroll Taxes."

The actual type of General Ledger (GL) account would typically be an "Expense" account.

Here's a general overview of how these accounts might be structured:

Member Draw (Owner's Salary): Debit "Member Draw" (Equity Account) and Credit "Bank" (Asset Account).
Employer Payroll Taxes: Debit "Payroll Tax Expense" (Expense Account) and Credit "Bank" (Asset Account).

Feb 04, 2012
Employer Portion of Payroll Taxes
by: Dave

The employer portion of payroll taxes is an expense. Usually one can title the expense as Payroll tax expense. This can include employer portions of SSI and Medicare. You may or may not want to add another expense account for unemployment taxes as these are also considered a payroll expense. Since you can't have employees without paying all of these necessary evils (taxes).

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Single Member LLC

by Dave

Single Member LLC

Single Member LLC

I'm currently dealing with a challenging scenario with one of my clients and could use some guidance or suggestions on the best way to proceed. This particular client owns a business that was originally established as an LLC. Earlier in the year, he had planned to convert this LLC into an S-Corporation but ultimately decided against proceeding with the change.

Despite this, during the interim period when he was considering the conversion, he set himself up as an employee of his own business. This included drawing a regular salary with the appropriate taxes being withheld, a practice he continued until midway through the following year.

The predicament I find myself in is that I understand this is not permissible for a Schedule C filer, which is the category he falls under. I'm at a loss as to what should be done next in this situation.

One possible solution that I'm considering is to amend the 941's and state withholding forms that were previously filed to account for his personal payroll. Once this is done, the next step would be to wait for the refunds to be processed. However, I'm concerned about the potential red flags this might raise.

On the other hand, I'm wondering whether it would be more prudent to simply proceed with filing the W-2 and not take any additional action, considering that the taxes on his paycheck have already been paid in full.

I would greatly appreciate any opinions, insights or resources you might be able to provide to help me navigate this complex situation. Thank you in advance for your assistance.

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Jul 18, 2023
LLC Designation
by: BB

Your question pertains to a complex area of taxation that often requires professional advice, so it would be best to consult with a CPA or tax attorney for your client's specific situation. However, here are some general guidelines based on the information you provided.

First, you're correct that a Schedule C filer typically cannot be an employee of the business. Instead, they are considered self-employed, and their business income and expenses are reported on Schedule C of their personal income tax return.

If your client has been treating himself as an employee and drawing a regular paycheck with taxes taken out, you might need to adjust how these transactions are accounted for. Instead of treating the amounts as wages, you might need to classify them as owner's draws or distributions.

Amending the 941's and state withholding forms and waiting for refunds could be one solution, but it could indeed raise red flags with tax authorities due to the changes in reported wages. It might also create additional paperwork and administrative burden for your client.

Alternatively, if the client hasn't yet filed his personal tax return for the period in question, you might be able to handle the situation there. If the taxes have already been paid, it's likely that they can be credited against any self-employment tax or income tax due on the Schedule C. This approach could be less likely to raise red flags, since from the tax authorities' perspective, the taxes have been paid either way.

Regardless of the chosen path, it's crucial to ensure that your client understands the tax and legal implications of being a Schedule C filer versus an employee. Make sure to consult with a tax professional to navigate this tricky situation correctly.

Please note that tax laws can change, and the information I have provided is based on tax laws in the U.S. as of 2021.

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