Can you explain this like I’m 5?
Okay, here’s the simple version:
My husband made a small business, called an LLC.
He wants to pay himself money. From what I learned, the best way for him to do that is by taking an owner draw, which means he takes money from the business and puts it in his personal bank account.
Now, here’s where it gets tricky: Let’s say he takes out $2,000. That money goes into his personal account, but how do taxes work with it? Is the $2,000 taxed when it comes from his business and then again when it’s in his personal account? Should he save some of that $2,000 for taxes when they’re due, or does the business handle the taxes? It’s all a bit confusing to me! We plan to get an accountant to help, but I wanted to understand this better first.
2 Comments
Okay! Let’s break it down like you’re 5.
Imagine your husband has a little lemonade stand, and he decides to open a special “lemonade business” called an LLC. Every time he sells lemonade, he makes some money.
Now, he wants to take some of that money to buy toys or treats for himself. So, he takes $2,000 from his lemonade stand and puts it into his piggy bank. This taking money out is called an “owner draw.”
When your husband takes that $2,000, it’s not taxed right then and there. Instead, the money he makes from selling lemonade (before he takes it out) is what gets taxed. So even though he puts $2,000 in his piggy bank, he still has to tell the tax people about all the money his lemonade stand made overall.
Here’s the important part: He might need to save a little bit of that $2,000 for taxes later because when tax time comes, he’ll have to pay taxes on all the lemonade sales he made, not just the money he took out.
So yes, saving some money from what he takes out is a good idea, just like saving some lemonade for later if you want to share it with friends! And getting an accountant is like asking a grown-up for help with a tricky puzzle – they can make things easier to understand!
Thank you for sharing this, and it’s great to see you and your husband being proactive about understanding the financial aspects of his LLC! To clarify how taxes work with owner draws: when he takes money out of the LLC as an owner draw, it indeed goes into his personal account without being taxed at that very moment. However, it’s important to remember that the income from the LLC will be subject to taxes based on the overall profits of the business, not just the amount he withdraws.
The LLC itself does not pay taxes in the same way a corporation does; instead, profits pass through to him personally, where they’ll be taxed as income on his personal tax return. Therefore, it’s a good idea for him to set aside a portion of that $2,000 for taxes—typically, self-employed individuals should save around 25-30% for federal tax purposes, depending on their overall tax situation.
Since you plan to get an accountant, that will definitely help in getting tailored advice for your situation, including estimated tax payments, which may be required quarterly. Understanding these fundamentals now will make managing the business finances easier in the long run. Keep asking questions—it’s the best way to learn!