FAQ for New LLC Owners in the Construction Industry

Think of your LLC like a separate person who has its own bank account. When your LLC makes money from jobs, that money goes into the LLC's bank account, not directly into your pocket. To pay yourself, you have two options:

• Draws: You can take money out of the LLC's bank account whenever you need it. This is called a "draw." It's like giving yourself a personal paycheck without the payroll tax formalities. Remember, every dollar you draw out is a dollar the LLC can't use for expenses or to grow the business.
• Salary: If you decide your LLC should be treated like an S Corp for tax reasons (more on this later), you'd pay yourself a regular wage through payroll. This means setting up and deducting Social Security/Medicare, unemployment, and other withholding taxes just like any other job you've had. When you make the S Corp election, you also have the option to take a draw to pay yourself on top of the wage through payroll.

The short answer is: it's based on how much money your LLC makes after paying for all the job costs, tools, supplies, and other expenses needed to run your business. Here's the breakdown:

• Bookkeeping: First off, you have to keep track of every dollar that comes in and every dollar that goes out. This is called bookkeeping. It tells you if you're making a profit or not by subtracting your expenses from your income.
• Profitability: When it's time to figure out your taxes, you're looking at the net profit your LLC made, not just the total amount of money you received. For example, if your LLC made $100,000 in sales from jobs, and spent $60,000 on materials, wages, and other expenses, then your profit would be $40,000. That $40,000 is what you pay taxes on. From there, we calculate your tax rate and multiply your profit by that rate. For example, if you had a flat 20% tax rate, you would owe $8,000 in tax from the $100,000 in sales you brought in: $100,000 - $60,000 = $40,000, and 20% of $40,000 = $8,000

Answer: Our country’s graduated tax bracket system determines your rate. We take into consideration your filing status - Single, Married (filing jointly or separately), Head of Household, or Widow. The more income you make leads to a higher percentage of tax you will pay. Below is a simplified method to calculate your tax owed. Let’s use a Single status filer for our example:

Here are some additional resources to view specific brackets for your situation:  

• https://www.irs.gov/filing/federal-income-tax-rates-and-brackets 
• https://www.forbes.com/sites/kellyphillipserb/2023/11/09/irs-announces-2024-tax-brackets-standard-deductions-and-other-inflation-adjustments/?sh=1bc903911c13

Deciding to treat your LLC like an S Corp can save you money on taxes, especially if you're making good money. Here's the deal:

• As an LLC, all the profits go to you and get taxed at your personal rate, including SE Taxes (that's the Social Security and Medicare or self employment tax).
• If you elect to be treated as an S Corp, you can pay yourself a reasonable salary for your work (which is subject to payroll taxes). But, any profit above that salary might only be taxed at the income tax rate, skipping the self-employment tax part. This could mean less tax overall.
• But, there's a catch: Setting up as an S Corp means more paperwork and following more rules, like running payroll and holding meetings. It's not for everyone, especially if you're just starting out and keeping things simple.
• Bottom Line: If your LLC is making more money than you'd pay someone else to do your job, talking to a tax pro about the S Corp option might save you some tax. If you're just getting by, it might be more hassle than it's worth right now.