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Good morning and Happy Holidays!

1. Feature: Year-End Pay Review for LLC Owners (4 min)

2. From the Archive:

   • When You Need an Appraisal for Your Business

   • Should You Be The Registered Agent Of Your LLC?

3. Dear TCoL: Firing Someone During the Holidays

-TCoL

Missed our last feature article? How to Fire a Customer

If you own an LLC, there is a good chance you decide your own pay. You may move money in and out of the business account when cash is available and call it a draw or a distribution. That feels flexible, but the IRS does not care what you call it. It cares how your LLC is taxed and how much profit the business actually makes.

This December is the first year-end governed by the One Big Beautiful Bill Act, often shortened to the One Big Beautiful Bill or OBBBA. The law made the 20% qualified business income deduction permanent for pass-through businesses, expanded Section 179 expensing, restored full expensing of domestic research costs beginning in 2025, and raised the cap on the state and local tax deduction for many individual owners for the next several years. Those are real wins. But none of them changed how LLC owners are taxed or the longstanding requirement that S corporation owners pay themselves a reasonable salary.

So, your job at year end is to match your pay to the tax rules you already live under and use the new law to your advantage. Here is how to begin that process.

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How Is Your LLC Taxed Today

The same three letters, LLC, can describe very different tax worlds.

If you never filed an S corporation election with the IRS, your LLC is usually taxed as a sole proprietorship if you are the only owner, or as a partnership if there is more than one owner. The profit passes through to you and you report it on your individual return. For most active owners that profit is subject to both income tax and self-employment tax. The self-employment tax rate remains 15.3% on most net earnings, with the Social Security portion capped at the annual wage base and an additional Medicare surtax at higher income levels. The One Big Beautiful Bill changed deductions and thresholds, and made the QBI deduction permanent, but it did not change this basic structure.

If you did file an S corporation election, your LLC follows a different set of rules. You are both an owner and an employee. The IRS expects you to pay yourself a salary for the work you do and run that salary through payroll with withholding and payroll taxes. Profit beyond that salary is often taken as an owner distribution. Those distributions are not subject to self-employment tax, though they remain subject to income tax. Reasonable compensation in an S corporation has been a point of IRS focus for years, and the agency is relying more heavily on data and analytics to identify outlier salaries.

If you are not sure which rules apply to you, pull last year’s tax return before you make any year-end decisions. It is worth ten minutes.

If Your LLC Has Not Elected S Corporation Status

For a single-member LLC taxed as a sole proprietorship or a multi-member LLC taxed as a partnership, the IRS starts with your net profit. It does not care whether you left that profit in the business, took it out as draws, or did a little of both.

Your year-end compensation review boils down to three questions.

First, what did the business actually earn. Pull a year-to-date profit and loss statement and a balance sheet. Ask whether those numbers reflect the real world. Adjust for unusual items, clean up obvious bookkeeping mistakes, and have your accountant correct anything clearly wrong rather than hoping it will not matter in April.

Second, how much have you taken out of the business. Add up your owner draws. Many owners discover that the cash they pulled out is higher than the profit the business earned. That does not change the current tax bill, but it does show whether you are draining working capital and setting up a cash problem next year.

Third, how much tax will that profit produce. For most active LLC owners, all net earnings are subject to self-employment tax in addition to income tax, with different treatment for some limited partners and passive investors. The One Big Beautiful Bill made the QBI deduction permanent and expanded or clarified some of the income ranges where the deduction phases in or out, but it did not reduce self-employment tax. A new minimum QBI deduction also begins for some smaller earners starting with post-2025 tax years.

The practical move at year end is to estimate your profit, apply a conservative combined tax rate, and compare that against the cash you have set aside. If you find a gap, you still have time to reduce year-end draws or make an estimated tax payment before penalties start.

The One Big Beautiful Bill did not change these fundamentals. It gave you more certainty that the QBI deduction will exist in future years and more predictable income ranges for calculating it, which makes long-term planning easier for default-taxed LLCs.

If Your LLC Has Elected S Corporation Status

If your LLC is taxed as an S corporation, the end of the year is your last clean window to correct your own pay.

The key idea is reasonable compensation. The IRS expects you to pay yourself as if you were hiring someone with your skills and responsibilities to do your job. That salary must run through payroll and be reported on a W-2. Profit beyond that salary can generally be distributed without self-employment tax. This is where tax savings can appear, and it is also where many owners overreach.

Your year-end S corporation review should focus on two numbers.

The first is your actual salary for the year. Look at your year-to-date payroll report and ask whether you could replace yourself with a competent non-owner for that amount. If the answer is no, you are likely in the danger zone. This is even more true now that the IRS uses automated tools and industry data to identify outlier compensation.

The second number is the profit the business will have after paying that salary and other expenses. That profit can often be distributed without self-employment tax and may qualify for the 20% QBI deduction, subject to limits and high-income rules. The One Big Beautiful Bill makes that deduction permanent and improves some of its mechanics beginning after 2025, but it does not convert wages into QBI. Your salary remains wages and your share of S corporation profit remains the key piece for the deduction.

If you conclude your salary is too low, you can usually correct that by running a final payroll or two in December. That increases payroll tax, but it strengthens your position and may improve retirement contributions that depend on W-2 earnings. If your distributions exceed profit and basis support, you may need to leave more cash in the company and treat part of what you withdrew as a loan or capital adjustment rather than a tax-free distribution.

What the One Big Beautiful Bill Changed for Owner Pay Decisions

Most headlines about the One Big Beautiful Bill focus on tips, overtime, depreciation, and international rules. For small business owners in LLCs, the important parts are quieter.

The law made the 20% QBI deduction permanent for pass-through entities and expanded or clarified some of the income ranges where the deduction phases in and out. It significantly increased Section 179 expensing limits and restored or expanded immediate expensing for qualified property and domestic research investments, which can affect year-end decisions about buying equipment or funding R&D. It also increases the cap on the state and local tax deduction for individuals through much of the decade, with higher caps for lower- and middle-income levels and reductions at higher incomes. Pass-through entity-level state taxes remain available in many states, which can help owners in higher-tax jurisdictions.

What the law did not do is remove self-employment tax from default-taxed LLC profits or loosen the rules on reasonable compensation for S corporation owners. Your profit is still taxed. An S corporation salary is still required. And self-employment tax still applies where it always has. The new law may lower or stabilize the federal tax bill for many owners and make planning more predictable, but it does not excuse sloppy owner pay practices.

A Simple Plan Before December 31

You do not need to become a tax expert this week. You do need a short, honest review.

Confirm how your LLC is taxed. Pull a current profit and loss statement and a balance sheet. Add up what you took out of the business this year. If you are a default-taxed LLC, estimate your combined income and self-employment tax and decide whether you should slow down draws or make an estimated payment. If you are an S corporation, decide whether your current salary can be defended as reasonable and whether you need a final payroll adjustment.

Then set aside an hour with a CPA who works with small businesses under the new law and ask them for a direct assessment of your owner pay, your QBI deduction, and your year-end position under the One Big Beautiful Bill. The rules are more generous and more settled in several areas, and December is the right time to turn that clarity into one more advantage rather than a future problem.

Note: This article is general information, not tax or legal advice. Your facts and your state rules matter, and a qualified CPA can help you match what you pay yourself to both the law and the business you are building.

Dear TCoL: Firing Someone During the Holidays

Question: I have an employee that I really should fire but I am somewhat reluctant to do so during the holidays. What do you think?

Answer: It’s a difficult position to be in, and the fact that you’re thinking about the timing already says something about how you approach people.

Long before getting my undergraduate degree, going to law school, or becoming a CEO, I grew up in a family car dealership. My dad had a hard and fast rule: no one gets laid off or fired from the Monday before Thanksgiving until January 2nd. The only exception was for something criminal or very near criminal. Period.

Throughout my career, I’ve had to fire employees and witnessed multiple firings. It is emotional for the supervisor and employee regardless of when it happens, but especially so during the holidays. For over 35 years, I have carried on with my dad’s rule – no firings from Thanksgiving until after the New Year. I’ve never once regretted waiting (even though I’ve questioned my decision more than a few times).

So, if you absolutely have to do it now, then do it. If you can wait, I don’t think you will regret holding off for a few extra weeks.

Hope this helps and enjoy the Holidays!

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