Running your own business comes with a lot of freedom, but that flexibility also brings responsibility. This includes how you pay yourself from your LLC. Paying yourself incorrectly can weaken your LLC’s liability protection, create tax headaches or even trigger an IRS audit.
The good news? You have several options for taking owner pay from an LLC. With the right structure, you can keep your finances organized and avoid preventable tax issues. This guide breaks down how LLC owners get paid, how taxes work and the most common mistakes to avoid.
Why Paying Yourself Correctly Matters
LLCs are popular among freelancers and small business owners because they provide personal liability protection without the strict rules of a corporation. However, that protection only works if you maintain a clear separation between business and personal finances, including how you withdraw funds from the business.
When owner compensation is handled correctly:
- Your LLC’s liability shield stays intact
- Your bookkeeping remains clean and accurate
- Your tax reporting stays compliant
- You reduce the risk of IRS penalties or audits
Understanding LLC Taxation
Before deciding how to pay yourself, you must first understand how the IRS taxes your LLC. By default, LLCs are considered “pass-through” entities. This means the business itself does not pay federal income taxes. Instead, the profits and losses “pass through” to the owners, who report this income on their personal tax returns.
The specific tax treatment depends on the LLC business structure:
Single-Member LLC
The IRS treats a single-member LLC as a “disregarded entity,” meaning it's taxed the same as a sole proprietorship. The owner reports all business income and expenses on Schedule C of their personal Form 1040 tax return.
Multi-Member LLC
By default, the IRS taxes a multi-member LLC as a partnership. The LLC files an informational tax return (Form 1065), and each member receives a Schedule K-1 detailing their share of the profits and losses. Members then report this information on their personal tax returns.
LLCs Electing Corporate Taxation
An LLC can elect to be taxed as an S corporation or C corporation, which changes how owners get paid and how taxes apply. These elections can unlock new compensation options and potential tax savings, but also come with added compliance requirements.
5 Ways to Pay Yourself From an LLC
Most LLC owners get paid in one of five ways: owner’s draws, profit distributions, salary, guaranteed payments or dividends. The correct method depends on your LLC’s tax classification.
1. Owner’s Draw (Most Common for Single-Member LLCs)
An owner's draw is the simplest way for LLC members to pay themselves. It involves transferring money from the business's bank account to your personal account.
Who it's for: This method is standard for single-member LLCs and multi-member LLCs taxed as partnerships.
How it works: You write a check from the LLC's account to your personal account or make an electronic transfer. These draws reduce your owner’s equity, not the business’s taxable income.
Tax implications: An owner's draw is not considered a business expense and does not reduce your LLC's taxable income. Instead, you pay taxes on your entire share of the LLC’s profits, regardless of how much you “draw” throughout the year. Your profits are subject to both regular income tax and self-employment taxes. Because taxes are not withheld from a draw, you must make quarterly estimated tax payments to the IRS.
Pro Tip: It's wise to set aside 25-35% of your profits to cover these federal and state taxes.
Retirement Savings Optimization
While contribution limits remain largely unchanged, the permanence of today’s tax brackets has major implications for retirement planning. Taxpayers can now approach Roth conversions and withdrawal strategies with more clarity, knowing the brackets are fixed.
Seniors, in particular, should evaluate how the new $6,000 bonus deduction impacts their retirement income planning. More broadly, consider whether pre-tax savings or Roth contributions better align with your long-term goals under the OBBBA’s framework.
2. Profit Distributions (For Multi-Member LLCs)
If you run a multi-member LLC, your business is considered a partnership unless you elect corporate taxation. Profit distributions are the standard way multi-member LLCs pay owners when taxed as partnerships.
Who it's for: Multi-member LLCs taxed as partnerships.
How it works: Profits are allocated based on each member’s ownership percentage outlined in your operating agreement. For example, if two partners each own 50% of the LLC and the business earns $100,000, each partner is taxed on $50,000—even if they leave most of the cash in the company. This often surprises new partners, which is why many LLCs plan regular distributions or set aside tax reserves.
Tax implications: Members pay income tax on their share of profit, whether they take distributions or not. While distributions don’t require payroll, they do require accurate bookkeeping and communication among partners to avoid year-end surprises.
3. Salary (W-2 Employee)
If your LLC elects to be taxed as a corporation, you are considered an employee of the company and may be required to pay yourself a salary.
Who it's for: Members of an LLC taxed as an S corp or C corp who are actively involved in running the business.
How it works: You must run payroll and issue yourself a Form W-2, just like any other employee. This means the LLC will withhold income taxes, Social Security and Medicare taxes from your paycheck. The company is responsible for paying the employer's share of payroll taxes.
Tax implications: The salary you receive is subject to standard employee payroll taxes. A key requirement is that your salary must be “reasonable compensation,” meaning it should be comparable to what someone in a similar role in your industry and geographic area would earn. For S corps, this is particularly important. Paying yourself too little to take more income as distributions (which are not subject to self-employment taxes) can trigger an IRS audit.
4. Guaranteed Payments (For Multi-Member LLCs)
Guaranteed payments are a specific type of compensation used in multi-member LLCs taxed as partnerships. These are fixed payments made to a member for services or for the use of capital, regardless of whether the LLC is profitable.
Who it's for: Members of a multi-member LLC taxed as a partnership who want consistent income.
How it works: These payments are outlined in the LLC's operating agreement and made regardless of profit. However, the recipient is not considered a W-2 employee.
Tax implications: Unlike an owner's draw, guaranteed payments are a deductible business expense for the LLC. These payments reduce the business's total taxable income. Members report guaranteed payments as self-employment income and pay income and self-employment taxes on it.
5. Dividends (For LLCs Taxed as C corps)
For LLCs taxed as C corporations, you may choose to distribute profits as dividends in addition to a salary.
Who it's for: Members of an LLC taxed as a C corp.
How it works: After paying corporate income tax on profits, the corporation may issue dividends to shareholders. This is separate from any salary the owner receives as an employee.
Tax implications: Dividends are subject to “double taxation.” The corporation pays taxes on its profits, and shareholders pay taxes on dividends they receive. While this structure is less common for small businesses, it can benefit companies that retain significant earnings or plan to expand.
Benefits of Paying Yourself Through an LLC
Forming an LLC gives you flexibility over how and when to pay yourself—something corporations and sole proprietorships don’t always offer. LLCs provide liability protection, simpler management requirements and the option to elect different tax statuses depending on your income needs and long-term goals.
As your business evolves, you can update your compensation strategy, elect new tax statuses or shift from draws to payroll. This adaptability is one of the biggest advantages of choosing an LLC structure.
Understanding Self-Employment Taxes
Self-employment tax includes Social Security and Medicare contributions. When you operate as a sole proprietor or partner, you’re responsible for paying both the employer and employee portions. That’s 15.3% total, although you can deduct half on your personal tax return.
If you operate through an S corporation and pay yourself a salary, you only pay payroll taxes on wages, not on distributions. This is where many owners see tax savings. However, you must balance distributions with a reasonable salary to remain IRS-compliant.
Best Practices for LLC Owner Compensation
To maintain your LLC's liability protection and stay compliant, follow these best practices:
Keep Finances Separate: Always maintain separate bank accounts and credit cards for your business and personal use. Mixing funds can put your personal assets at risk in a lawsuit.
Make Estimated Tax Payments: If you take an owner's draw or guaranteed payments, you are responsible for paying your own taxes. Make quarterly estimated tax payments to the IRS and your state to avoid underpayment penalties.
Consult a Tax Professional: LLC taxation is complex, especially if you are considering an S corp or C corp election. Working with an accountant or tax attorney can help you determine the most tax-efficient compensation structure and avoid mistakes.
Common Mistakes to Avoid
Evenwell-intentioned business owners can run into trouble. The most common missteps include:
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Paying yourself too little in an S corp
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Mixing business and personal finances
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Failing to track an owner’s draws or distributions
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Skipping quarterly tax payments
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Issuing yourself a 1099 (never allowed)
Avoiding these missteps strengthens your financial foundation and keeps your LLC compliant.
Choosing the Right Path Forward
Paying yourself from an LLC doesn’t have to be complicated. Choosing the right method depends on your tax classification, business profitability and personal financial goals. For some owners, a simple draw works best. Others benefit from predictable payroll or the tax savings of an S corp structure.
By understanding your options and following best practices, you can ensure your compensation strategy supports both your personal financial health and your business's long-term success.
FAQs:
How do I properly pay myself from my LLC?
The best method depends on how your LLC is taxed. Single-member LLC owners typically use owner’s draws, while multi-member LLCs rely on profit distributions or guaranteed payments. If you elect S corp status, you’ll pay yourself a W-2 salary plus optional distributions.
Can I pay myself as a 1099 from my LLC?
No. The IRS does not allow LLC owners to issue themselves a 1099, even if they perform work for the business. Paying yourself as a contractor misclassifies your income and can trigger an IRS review. Instead, use an owner’s draw, a guaranteed payment or a salary, depending on your tax structure.
What is the most tax-efficient way to pay yourself?
For many profitable LLCs, the most tax-efficient strategy is to elect S corp status and take a reasonable salary plus distributions. You pay payroll taxes only on the salary portion, while distributions are exempt from self-employment tax. This approach is ideal when profits support the added administrative work of payroll.
Do I have to pay taxes if I pay myself from an LLC?
Yes, but the way taxes apply depends on your LLC classification. In pass-through entities, taxes apply to your share of profits, whether you withdraw them or not. S corp owners pay income and payroll taxes on their salary, while distributions are taxed differently.
What percentage should I pay myself from my LLC?
While there isn't a set percentage, the correct percentage depends on cash flow, expenses and personal needs. Many tax advisors suggest paying yourself 30-50% of your annual profits. Another option is following the 50/30/20 method (50% for business expenses, 30% for owner pay and 20% for taxes). Consulting a financial advisor or accountant can help with determine the right amount.
Need expert guidance on your LLC compensation strategy? Contact an LTax team member today to schedule a consultation and get personalized answers for your business.
LEGAL OR TAX: The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.