How to Pay Yourself From an LLC

How you pay yourself from an LLC depends on how the LLC is taxed, not on the fact that it is an LLC. Most LLC owners take an owner's draw: they move money from the business account to their personal account, and they pay tax on the LLC's profit whether they draw it or not. Owners of an LLC taxed as an S corporation are different: they must pay themselves a reasonable salary through payroll and can take the rest as distributions.

The federal tax rules give an LLC four possible treatments: a single-member LLC is disregarded by default, a multi-member LLC is a partnership by default, and either can elect to be taxed as an S corporation or as a C corporation. Each one has its own way of getting money to the owner. This guide takes them in turn, then walks through taking a draw and the point where payroll, and the filings that come with it, begin.

The four ways, side by side

Single-member LLC: the owner's draw

A single-member LLC that has not elected corporate treatment is a disregarded entity: for income tax, the IRS looks straight through it to the owner, and the business goes on the owner's own return on Schedule C. That has one practical consequence that surprises many new owners. You cannot put yourself on payroll. IRS Publication 334 is plain about it: a sole proprietor can't deduct their own salary or any personal withdrawals, and is not an employee of the business. A disregarded LLC is treated the same way.

So you take a draw. A draw is not a wage and not an expense; it is you taking your own money out of the company. Nothing is withheld, no W-2 is issued, and the draw itself does not appear on the tax return. What is taxed is the LLC's net profit, the income minus the deductible expenses, and it is taxed in full whether you drew all of it, some of it or none of it.

The profit carries two federal taxes. One is ordinary income tax. The other is self-employment tax, the self-employed version of Social Security and Medicare, owed when net earnings from self-employment are $400 or more. Per the IRS, the rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. It applies to 92.35% of net earnings, and the Social Security part stops at the year's wage base, $184,500 for 2026, counting any wages you also earn elsewhere. The Medicare part has no cap, and an Additional Medicare tax of 0.9% applies above $200,000 for a single filer or $250,000 for a joint return. You figure it on Schedule SE and deduct half of it in arriving at adjusted gross income. The details are on the IRS's self-employment tax page.

An example. Cedar Path Studio LLC, owned by one designer, ends the year with $80,000 of net profit. She drew $50,000 and left the rest in the account. Self-employment tax is figured on all $80,000: 92.35% of it is $73,880, and 15.3% of that is about $11,304, with half, about $5,652, deducted on her return. Income tax is figured on the profit too. The $30,000 she did not draw is taxed exactly like the $50,000 she did.

Because nothing is withheld from a draw, the tax is paid during the year through estimated payments. The IRS expects them from an individual who will owe $1,000 or more when the return is filed, on Form 1040-ES, in four installments: April 15, June 15, September 15 and January 15 of the following year (the next business day when a date falls on a weekend or holiday). Paying at least 90% of this year's tax or 100% of last year's generally avoids the underpayment penalty; the IRS estimated tax page has the rules. More on one-owner companies is in single-member LLC.

Multi-member LLC: draws and guaranteed payments

An LLC with two or more members is taxed as a partnership by default. It files Form 1065, an information return, and gives each member a Schedule K-1 showing their share of the profit, which they report on their own returns. The IRS is explicit that partners are not employees and should not be issued a W-2, so members of a default LLC are not on payroll either.

Members get money out in two ways. A draw (or distribution) is a member taking part of their share of the profit; like a single owner's draw, it is not itself the taxable event, because each member is taxed on their share of the profit as allocated on the K-1 whether it was distributed or not. A guaranteed payment is a fixed amount paid to a member for services or for the use of capital, owed regardless of whether the LLC makes a profit. It is the closest thing to a salary a partnership has. The LLC deducts it as a business expense, it is listed on the member's K-1, and the IRS instructions for Form 1065 treat guaranteed payments for services as net earnings from self-employment, so the member pays self-employment tax on them.

Take Ridgeline Supply LLC, owned 50/50 by two members. One works in the business full time; the other put in the startup money and does not. The operating agreement gives the working member a guaranteed payment of $5,000 a month. At year end the LLC has $40,000 of profit after that payment, split $20,000 each on the K-1s. The working member reports $60,000 of guaranteed payments plus $20,000 of profit share. Draws of the profit share follow whatever the operating agreement says about timing and amounts, which is one reason to have one; see do you need an operating agreement. Members of a multi-member LLC also make their own estimated tax payments.

LLC taxed as an S corporation: reasonable compensation plus distributions

An LLC that elects S corporation treatment changes how its owners are paid. An owner who works in the business becomes an employee of it for payroll purposes and must be paid reasonable compensation as wages through payroll, with income tax withheld and Social Security and Medicare paid on both the employee's and the employer's side (6.2% and 1.45% each, the Social Security part up to the $184,500 base). Profit left after salary and expenses can be paid out as distributions, which are taxed on the owner's return through the K-1 but are not wages.

That split is where the tax saving comes from, and it is why the IRS watches it. Its page on S corporation employees, shareholders and corporate officers says the company must determine and report a reasonable salary for a shareholder who performs services, and that courts have treated distributions as wages where an owner took distributions instead of pay. The test is whether the payments were truly pay for the work done. How owners and their CPAs arrive at a figure, and when the election tends to pay for its added running costs, is covered in LLC vs S corp; the mechanics of switching an existing LLC over are at llc-ein.com.

LLC taxed as a C corporation: salary plus dividends

Few small LLCs choose it, but an LLC can file Form 8832 to be taxed as a C corporation. The company then pays income tax on its own profit on Form 1120. An owner who works in it is generally an employee, paid a salary through payroll that the IRS expects to be in line with their duties. Profit the company pays out to owners is generally a dividend, which is not deductible by the company and is taxed again on the owner's return. Owners who want to leave profit in the business to grow sometimes accept that trade; the wider comparison is in LLC vs corporation.

How to take an owner's draw, step by step

For a default-taxed LLC, the mechanics are simple, and doing them the same way every time keeps the books clean and the tax bill predictable.

1. Confirm how the LLC is taxed. If the LLC has elected S or C corporation treatment, the owner who works in it needs a salary through payroll first; a draw alone is not enough. A default LLC can pay its owners by draw.
2. Work out what the business needs to keep. Look at the balance against what is due before the next customer payment arrives: rent, suppliers, contractors, loan payments, card balances. Many owners keep a cushion of a month or two of expenses before drawing anything.
3. Set aside money for the tax on the profit. The tax is owed on profit, not on what you take, so a draw that empties the account can leave nothing for April. Many owners move a fixed share of each month's profit into a separate savings account for taxes; a CPA or tax preparer can suggest a share that fits your income.
4. Transfer the draw from the LLC's account to your personal account. Use a bank transfer or a check drawn on the LLC's account and made out to you. Avoid cash withdrawals and paying yourself through the LLC's card: a transfer leaves a dated record on both statements.
5. Record it as an owner's draw. In the books, a draw reduces the owner's equity; it is not payroll and not an expense. Publication 334 calls this the drawing account. In a multi-member LLC, keep a separate draw account for each member, so the year-end K-1s and capital accounts reconcile.
6. Pay quarterly estimated tax. Pay the estimated tax for the quarter from the reserve, on Form 1040-ES or through IRS Direct Pay or EFTPS. Most states with an income tax have their own estimated payments on a similar schedule.

What not to do

• Mixing business and personal money. Depositing business income into a personal account, or running the business out of one, makes the books hard to reconstruct and is one of the facts a court weighs when a creditor asks it to ignore the LLC's liability protection.
• Paying personal bills from the LLC's account. Your mortgage, groceries or personal card paid by the LLC are draws at best and misreported expenses at worst. Take the draw first, then pay the bill from your own account.
• Writing yourself a paycheck from a default LLC. A single-member or partnership LLC cannot treat its owners as employees. Running "payroll" for yourself without the S election creates filings that do not match your return.
• Drawing the tax money. Taking every dollar of profit leaves the self-employment and income tax unfunded, and missed estimated payments carry a penalty.
• Skipping salary after electing S status. Taking only distributions from an S corporation is the pattern the IRS page above describes courts recharacterizing as wages.

Separation starts with the company having its own bank account in its own name, which in turn starts with the company existing. The first steps after the filing are in what to do after forming an LLC.

When payroll starts: employees, or yourself as an S corp owner

Yes, an LLC can have employees, of any number, in any state. And there are two moments when an LLC becomes an employer: when it hires its first employee, and when it elects S corporation treatment and starts paying a working owner a salary. Either way, the payroll obligations are the same. The IRS's list includes collecting a Form W-4 from each employee, withholding federal income tax and the employee's Social Security and Medicare, paying the employer's share, depositing those taxes electronically, filing Form 941 every quarter and Form 940 for federal unemployment tax each year (that tax is paid by the employer, never withheld), and issuing W-2s each January.

For employment taxes, the IRS treats even a single-member LLC as a separate entity: it reports and pays them under its own name and its own EIN, not the owner's Social Security number, and an LLC needs an EIN as soon as it has any employees. The states then add their own layer. A state with an income tax issues a withholding account number, the state unemployment insurance agency issues an account and a tax rate, and both registrations ask for the federal number first. A single-member LLC that has been reporting under its owner's Social Security number gets an EIN at this point.

At tax time

Draws do not show up on any return, which is why the books matter: the return reports profit, and the draw records show where it went. A single-member LLC reports on Schedule C and Schedule SE with the owner's Form 1040; a multi-member LLC files Form 1065 and issues K-1s; an LLC taxed as an S corporation files Form 1120-S and its payroll returns. The forms, due dates and extensions for each are in how to file LLC taxes.