How to Pay Yourself From an LLC

How you pay yourself from your LLC depends on how your LLC is taxed. Single-member LLCs use owner's draws. Multi-member LLCs use draws or guaranteed payments. If your LLC is taxed as an S Corporation, you need to pay yourself a salary first. Each method has different tax consequences.

In a single-member LLC taxed as a sole proprietorship, you pay yourself through an owner's draw — a transfer of money from your business bank account to your personal account. Draws are not wages. The IRS treats your LLC's profits as your personal income whether you draw them out or leave them in the business.

You report that income on Schedule C when you file your personal tax return. There's no payroll process, no W-2, and no withholding — but you'll owe self-employment tax on your net earnings at a rate of 15.3%, which covers Social Security and Medicare.

Most single-member LLC owners take draws on a regular schedule — weekly, biweekly, or monthly — to keep their personal finances predictable. The amount you draw doesn't change your tax bill. You're taxed on profit, not on what you pull out.

In a multi-member LLC taxed as a partnership, members can receive profit distributions or guaranteed payments. Distributions are based on each member's ownership percentage as set out in the operating agreement. Guaranteed payments are fixed amounts paid regardless of whether the LLC turns a profit — they work more like a salary.

The LLC files Form 1065 and issues a Schedule K-1 to each member showing their share of income. Members then report that income on their personal tax returns. Guaranteed payments are deductible by the LLC and are reported on each member's Schedule K-1.

One thing that catches people off guard: in a multi-member LLC, you're taxed on your share of the LLC's profits whether or not the money was actually distributed to you. If the LLC made money and kept it in the business, you still owe tax on your portion.

If your LLC has elected S Corporation tax status by filing IRS Form 2553, the rules change. You must pay yourself a reasonable salary as a W-2 employee before taking any distributions. The IRS defines reasonable compensation as what you'd pay someone else to do the same work at a comparable business.

Your salary goes through payroll — you withhold income tax, Social Security, and Medicare, and the business pays its share of payroll taxes. After paying yourself a reasonable salary, you can take additional profits as distributions. Those distributions are not subject to self-employment tax, which is where the potential tax savings come from.

Skipping the salary or setting it unreasonably low is one of the most common mistakes S Corp owners make — and the IRS looks for it. If your salary doesn't hold up to scrutiny, the IRS can reclassify your distributions as wages and you can end up on the hook for back payroll taxes and penalties.

The tax treatment of your pay depends on your LLC's tax classification. Here's how each scenario works.

Single-member LLC (sole proprietorship)

Your LLC's net profit flows to your personal tax return on Schedule C. You pay income tax at your individual rate plus self-employment tax at 15.3% on net earnings. No payroll setup is required, but you'll need to make quarterly estimated tax payments to avoid underpayment penalties.

Multi-member LLC (partnership)

Each member pays income tax on their share of LLC profits as reported on their Schedule K-1. Members who receive guaranteed payments also owe self-employment tax on those amounts. Profit distributions beyond guaranteed payments are generally not subject to self-employment tax.

LLC taxed as an S Corporation

Your W-2 salary is subject to payroll taxes — both your share and the business's share. Profit distributions above your salary are taxed as ordinary income but are not subject to self-employment tax. A tax professional can help you figure out whether the S Corp election makes sense for your income level.

For draws and distributions, the mechanics are straightforward: transfer money from your business bank account to your personal account. Use your business account to receive revenue and pay business expenses. When you're ready to pay yourself, initiate a transfer — ACH, check, or wire — and record it in your bookkeeping as an owner's draw or distribution.

Keep your business and personal finances separate. Running personal expenses through your business account — or business expenses through your personal account — blurs the line between you and your LLC. If that line gets blurry enough, a court could decide your LLC isn't really a separate entity, and at that point your personal finances are fair game for business debts.

For S Corp salary, you'll need a payroll system. Options like Gusto, QuickBooks Payroll, or ADP handle withholding, deposits, and year-end W-2s. Your salary hits your personal account on a regular payroll schedule, just like any other employee.

There's no universal formula, but a practical starting point is to cover your personal living expenses and leave enough in the business to cover upcoming costs and a cash reserve. Most LLC owners figure this out by looking at their average monthly profit over the prior 3 months and drawing a percentage of that.

For S Corp owners, the reasonable compensation standard is the binding constraint. The IRS expects your salary to reflect what the market would pay for your role. Industry salary data, job postings for comparable roles, and guidance from a tax professional are the most defensible ways to set that number.

One thing most new LLC owners underestimate: you're responsible for your own tax payments. Unlike a W-2 job where taxes are withheld automatically, LLC owners need to set aside money for quarterly estimated taxes. A common approach is to reserve 25–30% of each draw for taxes until you have a clearer picture of your annual liability.