Key Takeaways

  • LLC owners can pay themselves through owner’s draws, guaranteed payments, or salaries, depending on their tax classification and business structure.
  • Single-member LLCs typically take draws, while multi-member LLCs divide profits among members based on ownership percentage.
  • LLCs taxed as S corporations or C corporations must pay owners a “reasonable salary,” which is subject to payroll taxes.
  • It’s important to keep accurate records of distributions, salaries, and taxes to avoid IRS scrutiny.
  • Understanding self-employment taxes, estimated tax payments, and deductible business expenses helps LLC owners plan smarter compensation.

How to Pay Yourself in an LLC

If you're planning on becoming involved with an LLC, you may be wondering: how do LLC members pay themselves? You have two options when it comes to paying yourself:

  • You can take wages as an employee
  • You can pay yourself profits as an LLC member

Members can also access and pull periodic draws. 

Types of LLC Member Payments Explained

LLC owners can pay themselves in a few different ways depending on how the business is structured for tax purposes:

  1. Owner’s Draw (Default for Single-Member and Multi-Member LLCs):
    Most LLC owners pay themselves by taking an “owner’s draw.” This means withdrawing money from the business’s profits rather than receiving a formal paycheck. These draws are not subject to withholding taxes, but owners must still pay income and self-employment taxes when they file their returns.
  2. Guaranteed Payments (for Active Members):
    In multi-member LLCs, active members can receive guaranteed payments—set compensation for their work regardless of business profit. These payments are deductible business expenses for the LLC and must be reported as income by the recipient.
  3. Salary (for LLCs Taxed as Corporations):
    If an LLC elects to be taxed as an S corporation or C corporation, members who work for the company must be paid a salary. This requires regular payroll withholding, W-2 forms, and employer tax contributions. Salaries are considered operating expenses and reduce the LLC’s taxable income.

Employee Wages for LLCs

In terms of the first option, as long as you are actively involved you are eligible for wage payments as an employee of your LLC. For example, if you are in charge of marketing and managing all client relationships, you have an active role in the company. Since you are fulfilling a key role, you can set yourself up as an employee. There is also the option of compensation as an independent contractor. However, this structure does not make sense for most companies.

LLC Payment Rules by Tax Classification

How LLC owners get paid depends on the business’s federal tax classification:

  • Single-Member LLC (Disregarded Entity): The IRS treats this LLC like a sole proprietorship. Owners take draws, and profits are reported directly on Schedule C of their personal tax return.
  • Multi-Member LLC (Partnership): Members receive profit distributions or guaranteed payments, and the LLC files Form 1065 with Schedule K-1s showing each member’s income share.
  • LLC Taxed as an S Corporation: Owners must pay themselves a reasonable salary via payroll, with taxes withheld, and may also take additional profit distributions not subject to self-employment tax.
  • LLC Taxed as a C Corporation: Owners who work in the company are W-2 employees and may also receive dividends, which are taxed separately.

This distinction is essential because it affects how much tax the owner pays and how much flexibility they have in structuring compensation.

Profit Distribution for LLCs

As an LLC member, you also have the option to receive year-end profit distributions. Since each member will have a percentage interest, also known as the member's capital account, they will be eligible for their portion of the profits. For tax purposes, these profits generally pass through to the LLC members. For example, if you own 20 percent of the company, you are entitled to 20 percent of the profits. 

If you do not want to receive wages as an employee but would still like to receive periodic payments throughout the year, you can generally do so as long as it is viable. When you do take a draw, which will be an advance payment on the expected year-end profits, your capital account decreases. If you take this approach, your capital account will go back up at the end of the year once all of the LLC's profits are accounted for. 

Owner’s Draw vs. Profit Distribution: Key Differences

While both draws and profit distributions allow owners to take money from the business, they differ in timing and tax treatment:

  • Owner’s Draw: Withdrawn from business funds at any time during the year and considered a pre-tax payment. The owner later pays taxes on the profits reported through their personal return.
  • Profit Distribution: Typically occurs at year-end based on the LLC’s total net profit and each member’s ownership percentage.
  • Tax Tip: Owners should set aside money for quarterly estimated tax payments since taxes aren’t withheld from these payments. Failing to do so can result in IRS penalties.

Maintaining proper accounting of these payments helps track each member’s capital account balance and ensures that withdrawals don’t exceed available equity.

Forms Used By LLCs for Payment

As an LLC, you must file the right tax forms. This is why you are highly encouraged to keep accurate, organized records throughout the year. 

  • Members who will be paid as an employee must file Form W-4. The LLC itself will pay these employee-members as a W-2 employee. 
  • If you are paying yourself as an independent contractor, you will need to file Form W-9 with the LLC. Then the LLC need to file Form 1099-MISC with the IRS. 
  • If you are taking draws, you need to keep track of each payment in terms of your capital account. Since this can become fairly complicated, sometimes it is best to seek the assistance of a professional accountant. 

Payroll and Tax Forms for Different LLC Types

LLC payment documentation varies depending on how the business compensates its owners and employees:

  • Form W-2: Used if the LLC pays members as employees (corporation tax election).
  • Form 1099-NEC: For independent contractors paid by the LLC.
  • Schedule K-1 (Form 1065): Reports each member’s share of profits and losses in multi-member LLCs.
  • Form 941 and 940: Payroll tax forms required for LLCs running payroll for employees.
  • Form 1040 Schedule SE: Used by owners to calculate and pay self-employment taxes.

Keeping these forms organized ensures accurate reporting to the IRS and reduces the risk of compliance issues.

Taxes for LLCs

Understanding taxation in terms of your business structure is imperative before you begin operating as an LLC. When you know what will be expected of you at the end of the year, you can ensure all LLC records are organized and accounted for. 

  • When you pay yourself as an employee, the LLC must withhold both employment and income taxes from each payment. 
  • If you are receiving payment as an independent contractor, the above taxes do not need to be withheld. Instead, you will pay these taxes on all payments received when you file your individual tax return. 

Understanding Self-Employment and Payroll Taxes

LLC owners often face confusion about which taxes apply to their compensation. The answer depends on whether they’re paid through draws, guaranteed payments, or salaries:

  • Self-Employment Taxes:
    LLC members who take draws or guaranteed payments must pay Social Security and Medicare taxes on their earnings. These are reported via Schedule SE and currently total 15.3%.
  • Payroll Taxes:
    If the LLC elects corporate taxation, it must withhold and remit federal and state income tax, Social Security, and Medicare from wages.
  • Estimated Tax Payments:
    Members should make quarterly estimated tax payments to avoid penalties for underpayment.

Tax planning—especially for LLCs taxed as S corps—can significantly reduce self-employment tax obligations by balancing salaries and distributions strategically.

Reasonable Compensation/Wages Explained

When it comes to taking a salary, the IRS requires that the owner make a reasonable amount for the work they do. As a guideline, it is recommended that you pay yourself an amount similar to what another business would pay someone who does what you do within the company. 

It is important you're aware of what the IRS expects in relation to payroll taxes. S-Corp owners have come under scrutiny the past few years because they often take draws instead of a salary. This helps them avoid payroll taxes, which can come at an unexpected cost. One of the largest financial risks associated with this approach is incorrect payroll tax reporting. This can result in significant interest and associated penalties. 

Setting a Fair Salary for S Corp-Elected LLCs

If your LLC elects S corporation status, the IRS requires you to pay yourself a reasonable salary before taking profit distributions. “Reasonable” means an amount similar to what someone else doing the same job in your industry would earn.

The IRS may review your salary if it seems too low, as underpaying yourself to avoid payroll taxes can trigger audits and back tax assessments.To set a reasonable salary, consider:

  • Industry standards and job duties
  • Experience, qualifications, and business size
  • Number of hours you work
  • Geographic location

Consulting an accountant or payroll service can help ensure compliance and optimize the tax benefits of S corporation status.

Frequently Asked Questions

  1. Can an LLC owner pay themselves a regular paycheck?
    Yes. LLCs taxed as S or C corporations can issue paychecks with tax withholdings, just like standard employees.
  2. Do single-member LLCs pay themselves through payroll?
    No. Single-member LLC owners typically take draws and report income on their personal tax return.
  3. How often should LLC owners pay themselves?
    Owners can take draws as needed or schedule regular distributions, but maintaining consistency helps with bookkeeping and tax planning.
  4. Are LLC owner draws tax deductible?
    No. Owner’s draws are not business expenses and cannot be deducted from LLC income.
  5. How can I minimize taxes as an LLC owner?
    Electing S corporation status and paying yourself a reasonable salary while taking profit distributions can lower self-employment taxes. Always seek professional tax advice before making this election.

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