Taxes Made Simple

Monty (graphic designer) asks:

Mike, I have a graphic design business, which is set up as an LLC. I was paid $4,000 for one large job I did for a client. All $4,000 went into my business checking account, but I transferred $3,000 of that money into my personal account afterwards. Is my taxable income 3,000 or 4,000? And what amount do I have to pay self employment tax on?

Answer:

Hi Monty. Because an LLC is what’s known as a pass-through entity, the IRS simply treats the business as if it were an extension of yourself. Anytime the business receives income, it counts as income to you. The amount you pay out to yourself is irrelevant; it counts as neither a deduction nor as income. Therefore, in your situation, $4,000 is the amount you will be paying both income tax and self-employment tax on. [Note: in the above example, it would work exactly the same way if the business was a sole proprietorship instead of an LLC.] 

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