Yes, under certain business structures, most notably a Limited Liability Company (LLC), it is possible to pay yourself as an independent contractor, provided you adhere to specific legal and tax requirements. This method is distinct from other forms of owner compensation like salaries or owner's draws and is typically considered when you are performing services for your company that would otherwise be outsourced.
Understanding Your Role as a "Contractor" to Your Own Business
When you pay yourself as a contractor, it implies a relationship where you, as an individual (or perhaps through another entity you own), provide services to your primary company, much like an external vendor. This arrangement is most commonly seen with LLCs, where the owner is not necessarily an employee but an independent member.
How to Pay Yourself as a Contractor from an LLC
For an LLC, paying yourself as an independent contractor is a recognized method for owner compensation, especially if you are performing specific, definable services that could be provided by an external third party.
Required Forms and Filings
To ensure compliance with tax regulations, there are specific forms and procedures your LLC must follow:
- IRS Form W-9: As the individual independent contractor, you must provide your LLC with a completed IRS Form W-9, Request for Taxpayer Identification Number and Certification. This form collects your taxpayer identification number (TIN) and certification information.
- IRS Form 1099-MISC: Your LLC, acting as the payer, is then responsible for filing IRS Form 1099-MISC, Miscellaneous Information at the end of the year. This form reports the nonemployee compensation paid to you as a contractor, provided the amount paid exceeds the IRS threshold (typically $600 in a calendar year).
This process ensures that the IRS is aware of the income you received as a contractor from your LLC, which you will then report on your personal income tax return. For more insights on paying yourself from an LLC, you can refer to resources like LegalZoom's guide on paying yourself in an LLC.
Tax Implications and Alternative Payment Methods
When you receive payment as an independent contractor, this income is subject to self-employment taxes (Social Security and Medicare taxes) in addition to regular income tax. It's crucial to account for these taxes when planning your finances.
Alternative Payment Methods
Beyond paying yourself as a contractor, business owners have several other ways to extract funds from their companies, each with different tax implications:
- Owner's Draw/Distribution: Common for sole proprietorships and LLCs (especially those taxed as pass-through entities). This involves directly withdrawing funds from the business's profits. These withdrawals are generally not considered taxable income themselves but reduce your basis in the company; your share of the business's net profit is what's taxed at your personal income tax rate, regardless of whether it was distributed.
- Salary (W-2 Employee): For S-Corporations and C-Corporations, owners who actively work in the business typically receive a reasonable salary as a W-2 employee. This income is subject to payroll taxes (FICA), which are split between the employer and employee.
- Business Loan: LLC members can also take a loan from the business. This option allows members to access cash without affecting their immediate tax liability, provided the loan is structured legitimately with repayment terms, interest, and proper documentation, similar to any arm's length loan.
Key Considerations for Compliance
Paying yourself as a contractor requires careful attention to detail to avoid issues with tax authorities. It's essential to:
- Maintain Clear Separation: Ensure that the services you provide as a contractor are distinct from your duties as an owner or manager.
- Document Everything: Keep meticulous records of services performed, invoices, and payments.
- Consult Professionals: Always consult with a tax advisor or legal professional to determine the most suitable payment structure for your specific business entity and to ensure full compliance with all applicable laws and regulations.
Overview of Payment Methods by Business Structure
| Business Structure | Typical Payment Methods | Key Tax Implications |
|---|---|---|
| Sole Proprietorship | Owner's Draw | Business profits (and losses) pass directly to owner's personal income tax return. Subject to self-employment taxes. |
| Limited Liability Company (LLC) | Owner's Draw/Distribution, Independent Contractor Payment, Salary (if taxed as S-Corp/C-Corp), Business Loan | Taxed based on election (Sole Prop, Partnership, S-Corp, C-Corp). Contractor payments subject to self-employment tax. |
| S-Corporation | Reasonable Salary (W-2), Distributions (non-wage) | Salary subject to payroll taxes. Distributions typically not subject to self-employment tax. |
| C-Corporation | Salary (W-2), Dividends | Salary subject to payroll taxes. Dividends subject to corporate tax (at company level) and then personal income tax (double taxation). |
