How to pay myself from a US LLC, non resident: draws, not wages

The IRS has a one-line answer for the owner of a single-member LLC who wants a payslip from the company: “Generally an individual owner of a single-member LLC classified as a disregarded entity isn’t an employee of the LLC”.

That sentence from Publication 3402 shapes the whole question of how to pay myself from a US LLC, non resident or not. The money moves anyway, just under another name.

I read the IRS pages on single-member LLCs and on paying yourself, the Form 5472 instructions, the Delaware LLC Act and the CFPB’s remittance rule this month. I set them side by side to follow one transfer from the company account to a personal one abroad, and each of them describes a different side of it.

The owner takes a draw or a distribution. The company keeps a record of it, and for a foreign owner the transfer appears on a yearly information return.

A salary is the one thing the default rules do not offer.

How to pay myself from a US LLC, non resident: is payroll an option?

Not under the default rules, because the IRS treats the owner of a disregarded single-member LLC as someone other than its employee.

The LLC’s tax classification is what sets that result. The IRS page on single-member LLCs says that for income tax purposes “an LLC with only one member is treated as an entity disregarded as separate from its owner” unless it elects otherwise on Form 8832.

Employment tax is the one place where the LLC stands apart. The same page adds: “However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity”.

That separate status matters only for people the LLC employs. Publication 3402 illustrates it with an LLC that pays three employees and files their wage returns under its own name and EIN, and the owner in that example is not one of them.

Paperwork alone cannot change that label for the owner. The IRS page on paying yourself says “You cannot designate a worker, including yourself, as an employee or independent contractor solely by the issuance of” a Form W-2 or a Form 1099-NEC.

Two owners do not change the answer either. With a second member the LLC is a partnership by default, and the same IRS page says: “Partners are not employees and should not be issued a Form W-2”. Their distributions and guaranteed payments go on Schedule K-1 of Form 1065.

A corporate election is the route that brings a salary back. On the paying yourself page, “An officer of a corporation is generally an employee”, and an LLC becomes a corporation for tax purposes only by electing it on Form 8832.

That route brings its own payroll duties. The same page says an officer’s wages should generally be commensurate with the officer’s duties. A company that treats an officer as a nonemployee can be liable for social security and Medicare taxes, withheld income tax and the trust fund recovery penalty.

Payouts change character under that election too. The page says any distribution to shareholders from earnings and profits is generally a dividend.

That election is not easy to undo later. The IRS warns that after a change of classification an LLC “cannot elect again to change its classification during the 60 months after the effective date of the election”.

Owner draw, single member LLC, foreign owner: what does the IRS see?

To the IRS, a draw from a single-member LLC owned from abroad is money moving between a company and its sole owner, not pay for work.

For income tax, the LLC’s activities sit on the owner’s side. The IRS page says a disregarded LLC’s activities should be reflected on its owner’s federal tax return, and nothing on that page turns the owner into a payee on a W-2.

Information reporting is where a foreign owner’s case differs. The Form 5472 instructions treat a domestic disregarded entity wholly owned by a foreign person as a corporation for the limited purposes of section 6038A, the reporting rules for foreign-owned companies.

That treatment brings draws and transfers into view. The instructions say Part V covers transactions that “include amounts paid or received in connection with the formation, dissolution, acquisition, and disposition of the entity, including contributions to, and distributions from, the entity”.

Money the owner puts in counts the same way. A transfer from the owner to cover the company’s costs and a transfer back to the owner are both reportable, and each is described on a statement attached to the form.

The instructions define the foreign person behind such an LLC plainly. An individual who is not a citizen or resident of the United States is a foreign person, so an owner living in Lisbon or Medellín without US residence fits the definition.

Is a loan from the LLC a different thing from a draw?

Yes, and the Form 5472 instructions give loans their own lines in Part IV, apart from the Part V statement for distributions.

Amounts the LLC borrows from its owner go on one line. Amounts it lends to the owner go on another, reported either as beginning and ending balances for the year or as a monthly average.

The label has to match the substance. For corporations, the IRS paying yourself page says a loan to an officer should look like one made at arm’s length, with a contract, a stated interest rate, a repayment schedule and a consequence for failure to repay.

That passage is written for corporate officers, not for a disregarded LLC. I read it as a fair test of whether a transfer called a loan would read as one to anyone checking the books.

Part IV has two shortcuts for amounts. A reasonable estimate between 75 and 125 per cent of the actual figure is allowed when the real amount cannot be determined.

The second shortcut covers small totals. Any amount that does not exceed fifty thousand dollars may be reported as fifty thousand dollars or less, though the instructions put that rule in Part IV, not in the Part V statement for distributions.

Do distributions from LLC to foreign owner accounts need paperwork?

Distributions from LLC to foreign owner accounts need a basis in the company agreement, and in Delaware the LLC Act ties them to that agreement.

The Act’s section on interim distributions says a member “is entitled to receive from a limited liability company distributions before the member’s resignation” at the times and on the events the agreement sets.

Once a distribution is due, the member stands as a creditor. The Act gives that member the status of, and the remedies available to, a creditor of the company for that distribution.

Solvency sets the hard limit in Delaware’s statute. Section 18-607 bars a distribution when, after it, the company’s liabilities would exceed the fair value of its assets, leaving aside liabilities to members for their interests and debts limited to specific property.

A member who takes money knowing it broke that rule has to give it back. The Act says such a member “shall be liable to a limited liability company for the amount of the distribution”. A member who did not know is not liable.

A three-year clock limits that exposure in most cases. Unless otherwise agreed, a member has no liability for a distribution three years after it, unless a recovery action started within that period and ended in a finding of liability.

Pay for work sits outside this definition in the Act. Section 18-607 excludes reasonable compensation for present or past services from the term distribution, so the statute itself separates a payment for work from a payout to an owner.

Cash is the default form of a payout. Unless the agreement says otherwise, a member cannot demand a distribution in any form other than cash.

My reading is that a short written note for each payout, tied to the agreement and kept with the bank statement for that month, is the cheapest proof an owner abroad can keep.

What records should the LLC keep for each transfer?

The LLC keeps whatever records show the money’s path clearly, because the IRS leaves the format open but puts the burden of proof on the taxpayer.

Its recordkeeping page says: “You may choose any recordkeeping system suited to your business that clearly shows your income and expenses”.

The same page lists what good records do. They help monitor the business, prepare financial statements, identify sources of income, track deductible expenses and support items reported on returns.

Each transaction should leave a supporting document behind. The IRS lists purchases, sales and payroll among the transactions that generate such documents, and it calls the duty to substantiate entries on a return the burden of proof.

Retention is tied to the return, not to a fixed number of years, and the page says records stay as long as they are needed to prove the income or deductions on a return.

Form 5472 adds a stricter layer for a foreign-owned LLC. Its instructions require permanent books of account, and they say “These books must be sufficient to establish the correctness of the reporting corporation’s federal income tax return”.

The penalty attached to that duty is steep. The instructions say “A penalty of $25,000 will be assessed on any reporting corporation that fails to file Form 5472 when due and in the manner prescribed”.

It applies to missing records as well. If the failure continues more than 90 days after an IRS notice, another $25,000 follows for each 30-day period.

How does the money reach the owner’s bank abroad?

It leaves from an account held in the LLC’s name, and federal rules treat the transfer as a business payment, not a consumer remittance.

That label switches off a set of federal protections. The CFPB’s remittance rule defines a sender as a consumer acting primarily for personal, family or household purposes, and its official interpretation names a limited liability company among the business account holders outside that definition.

Its conclusion for those accounts is direct: “A consumer requesting a transfer from such an account therefore is not a sender”.

Personal accounts are treated differently in the same commentary. Its example is a consumer sending money from a personal checking account in a US state to that person’s own checking account in a foreign country. That consumer counts as both sender and designated recipient.

The disclosure, error resolution and cancellation sections that follow in the same subpart are written around that sender, so an LLC’s own transfer stands outside them.

Keeping the LLC’s money in the LLC’s account until the draw makes the trail easy to read.

A transfer description helps the bank and the books at once. I would write the word distribution and the period it covers in the payment reference, so the statement line matches the note in the company file.

Which forms show the money leaving the LLC?

The yearly record for a foreign-owned single-member LLC is Form 5472, attached to a pro forma Form 1120 that carries little more than the company’s name, address and two items on page one.

That pro forma return exists only for this purpose. The instructions say such an entity has no income tax return filing requirement, yet the section 6038A regulations require the pro forma return with Form 5472 attached.

Filing for these companies happens on paper or by fax. The instructions say a foreign-owned disregarded entity cannot file Form 5472 electronically and must use a dedicated IRS fax number or a dedicated mailing address in Ogden, Utah.

Extra time comes from Form 7004, filed by the regular due date. The instructions ask for the Form 1120 code on it and for the foreign-owned DE label written across its top.

The totals feed the first page of the form as well. Line 1f asks a foreign-owned disregarded entity for the total dollar value of its related party transactions, Part V included, so a year of draws ends up in that one figure.

No W-2 is part of this picture for the owner.

What do the IRS pages leave open?

The word draw itself does not appear in the IRS pages I read. They speak of distributions and contributions instead.

I cannot tell from them whether a monthly draw and a single year-end payout need different statements on the form.

State law is the second gap in what I read. I checked Delaware’s statute only, and a Wyoming or New Mexico owner checks that state’s own LLC act for its own distribution limits and its own rules on member liability.

I have not found an IRS page that caps the size of a draw.

A US tax adviser can confirm how a given LLC’s transfers belong on Form 5472, and a lawyer in the formation state can check the agreement against the statute.

My view is that the answer to how to pay myself from a US LLC, non resident edition, is undramatic: a documented distribution, sent from the LLC’s account, written down twice and reported once a year. A salary only enters through a corporate election, and that choice locks in for 60 months.

The next date that matters is the pro forma return’s due date.