How to pay yourself in an LLC

How to pay yourself in an LLC is a question that often leaves new small business owners more than a little confused.

When it comes to earning an income from your business, you’ve got a few options. Each one depends on how your LLC is taxed and comes with different tax implications.

Generally, you’ll pay yourself by taking an owner’s draw, which moves money from your LLC’s profits to you.

The rules differ if you choose to be taxed as a corporation. Owners who work in the business become employees, take a salary, and may also receive distributions or dividends, all of which must comply with IRS rules.

This guide covers everything you need to know about paying yourself in an LLC, so you can find the option that’s best for you.

How to pay yourself at a glance

LLC tax status	How owners get paid	Self-employment or payroll tax	Where it’s reported
Single-member LLC (default)	Owner’s draw	Self-employment tax on all net profit	Schedule C and Schedule SE
Multi-member LLC (default)	Draws (distributions) and guaranteed payments	Self-employment tax on each member’s share of profit plus guaranteed payments, for active members	Form 1065, Schedule K-1, Schedule E
S corporation election	Reasonable salary plus distributions	Payroll tax on salary only	Form 1120-S, W-2, Schedule K-1
C corporation election	Salary plus dividends	Payroll tax on salary; dividends taxed as income	Form 1120, W-2, Form 1099-DIV

A quick LLC recap

A limited liability company (LLC) is a hybrid business structure that combines parts of a corporation and a sole proprietorship.

By registering an LLC, you get the limited liability protection of a corporation with the simpler tax system of a sole proprietorship or partnership (depending on how many people own the LLC).

By default, the IRS treats a single-member LLC as a disregarded entity and a multi-member LLC as a partnership. Both are pass-through entities, which means you report your share of the business’s profits and losses on your personal income tax return and pay the tax yourself.

If you elect corporate tax treatment instead, owners who work in the business are treated as employees, take a salary, and the business runs payroll.

And while LLC laws vary by state, the federal tax rules are the same everywhere. The main types of LLCs for tax purposes are below.

Single-member LLC

The IRS treats an LLC owned by one individual like a sole proprietorship for income tax, and it’s the simplest way to run an LLC.

Multi-member LLC

An LLC with more than one member is treated as a partnership by the IRS unless it elects otherwise. Each member pays tax on their share of the profit.

LLC taxed as a corporation

An LLC can elect to pay taxes as either a C or S corporation. To do so, you file an election with the IRS.

How to pay yourself through an LLC

Single-member and multi-member LLC owners pay themselves by taking what’s known as an owner’s draw.

Owners of an LLC taxed as a corporation who work in the business are employees, so they take a salary and, if profits allow, distributions (S corporation) or dividends (C corporation).

There’s a little more to it than that, so here’s a closer look.

Single-member LLCs

A single-member LLC is a pass-through entity, which means all your LLC’s profits and losses pass directly to you. Because of that, you can’t pay yourself a W-2 wage. Instead, you take money out of the business, known as an owner’s draw.

An owner’s draw is a transfer of money from your LLC’s account to you. It isn’t a business expense, and it isn’t taxed when you take it, because you’re already taxed on the profit.

An owner’s draw can be a cash payment or a non-cash asset, such as a company computer or car. The frequency and amount of your draw are up to you, as long as the business can cover its bills.

How to pay taxes on your owner’s draw

You report your profits and losses by filing Schedule C (Form 1040) along with your personal tax return. The form says sole proprietorship on it, but it’s the right one.

When filing your tax return, remember that you pay income tax on all your LLC’s profit, even the part you don’t draw from the company.

Aside from income taxes, you also pay self-employment tax on your net profit for the year, whether or not you draw it.

Self-employment tax is 15.3% and covers Social Security (12.4%, on earnings up to $184,500 in 2026) and Medicare (2.9%).

You calculate it on Schedule SE and usually pay it during the year through estimated tax payments, along with your income tax.

Make estimated tax payments using Form 1040-ES or online through IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS).

Multi-member LLCs

The IRS taxes a multi-member LLC as a partnership, and members can be paid through draws, guaranteed payments, or both. Members can also elect corporate taxation and change how they get paid.

Option 1: draws from a partnership

Because partnerships are pass-through entities, members pay themselves by taking draws, also called distributions.

The LLC files an information return reporting its income, deductions, and credits on Form 1065, U.S. Return of Partnership Income.

A partnership doesn’t pay income tax. It passes its profits or losses through to its members, who include them on their own tax returns.

Each year, the LLC gives each member a Schedule K-1 showing their share of the income, which they use to prepare their personal tax returns.

Members who actively work in the business also pay self-employment tax on their share of the profit, using Schedule SE.

And like a single-member LLC, members pay tax on their full share of the profit, whether or not they draw it.

How partnership distributions work

Each member’s share of profit is usually set by their ownership percentage in the operating agreement, and each member has a capital account that tracks what they’ve put in and taken out.

For example, your LLC has 4 members, each owning 25%. The LLC’s annual profit is $100,000, so each member’s share is $25,000.

Say you only draw half your share ($12,500). You’ll still owe income tax on your full $25,000 share, and if you work in the business, self-employment tax on it too. The undrawn $12,500 stays in your capital account.

Another way to pay yourself in a multi-member LLC is to receive a guaranteed payment.

Option 2: guaranteed payments

Members can also receive guaranteed payments from the business. Unlike a draw, which comes out of a member’s share of the profit, a guaranteed payment pays a member for their time and services, regardless of profit. The LLC deducts it as a business expense.

How guaranteed payments work

Using the same scenario, say one member (Ava) is working longer hours and needs extra compensation.

Each member owns an equal share, and the LLC earns $120,000 before any guaranteed payments.

The members agree on a guaranteed payment of $1,000 a month to Ava, or $12,000 for the year. That leaves $108,000 of profit, or $27,000 per member.

All 4 members draw $25,000 during the year, Ava also receives her $12,000, and $8,000 stays in the LLC bank account to cover running costs.

How to report guaranteed payments to the IRS

The LLC reports a member’s guaranteed payments on their Schedule K-1. The member reports them on Schedule E (Form 1040) along with their share of the profit, and pays self-employment tax on them.

LLCs taxed as corporations

An LLC can elect to be taxed as a corporation by filing Form 8832, Entity Classification Election, or as an S corporation by filing Form 2553. It remains an LLC for all purposes except tax.

Owners who work in an LLC taxed as a C or S corporation are employees, so they’re paid a salary through payroll rather than by draws or guaranteed payments. They can also receive a share of the profit as distributions (S corporation) or dividends (C corporation).

Neither distributions nor dividends are subject to payroll tax, which is why the IRS watches the split between salary and profit payouts closely, as explained below.

How S and C corporations pay taxes

S corporation

An S corporation is a pass-through entity. Income and losses pass through to the owners, who pay income tax on their personal returns.

Owners who receive a salary have FICA taxes (Social Security and Medicare) withheld from their paycheck, and the company pays the employer’s share.

Distributions above that salary aren’t subject to Social Security and Medicare tax, which can mean real savings on payroll taxes. They’re still subject to income tax.

An S corporation reports its activity on IRS Form 1120-S.

C corporation

A C corporation pays income tax at the 21% corporate rate. Owners then pay income tax on any dividends they receive, which is the double taxation C corporations are known for. Salaries are a deductible business expense, so they’re taxed only once, as the owner’s wages.

As employees of their corporation, owners have income tax and payroll tax withheld from their salary.

The business files its year-end return on Form 1120.

How much should you pay yourself?

Once you’ve chosen how to pay yourself in an LLC, you have to decide how much to pay yourself.

When first starting out, many LLC owners leave enough profit in the business to fund future growth while taking enough to meet their basic needs. A simple way to work that out is below.

LLC business running costs

Start by estimating your LLC’s annual running costs. Include all your current creditors and debts, as well as the reinvestment you plan for growth. Add a rainy-day fund in case your cash flow dries up.

The number you arrive at is what your business must earn before you pay yourself.

Your minimum pay

Calculate your personal annual expenses, plus the taxes you’ll owe on your share of the profit, then add them to your LLC running costs. Now you know what your business must earn to cover your minimum pay.

Reasonable compensation

If your LLC’s annual profits are more than the running costs and your minimum pay, you can pay yourself more.

That’s simple if you’re taking an owner’s draw or guaranteed payment, as the profit flows through to your personal tax return either way.

But if your LLC is taxed as an S corporation and you take a salary plus distributions, you must pay yourself what the IRS calls reasonable compensation. Learn more in the guide to S corporation reasonable salary.

For example, say your 4-member LLC, taxed as an S corporation, earns a $400,000 profit. Each owner takes a $1,000 salary and an additional $99,000 as distributions, so payroll tax is paid on only $1,000 each.

In this scenario, the IRS can treat much of the distributions as wages. The result is back payroll taxes, plus penalties and interest.

But what does the IRS mean by reasonable compensation?

What’s considered a reasonable salary?

Tax regulations describe reasonable compensation as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. The IRS lists factors such as your training and experience, duties, time spent, and what comparable businesses pay.

You can research those factors with government wage data such as the Bureau of Labor Statistics occupational employment and wage statistics, which show typical pay by job and location.

It’s tempting to take as much as possible in distributions. But to stay on the right side of the IRS, work with an experienced tax accountant to set a defensible salary.

Choosing not to pay yourself

You can choose not to take any money and leave all profits in your LLC’s account for future reinvestment and development.

However, if your LLC is taxed by default as a single-member LLC or partnership, you and the other members still pay income tax on your shares of the profit.

Self-employment tax is also based on your share of the profit, not on what you draw, so leaving money in the business doesn’t reduce it.

How to avoid tax mistakes when paying yourself

Taxes are complicated, and that complexity sometimes causes business owners to make costly mistakes.

Your best bet is to hire a tax accountant familiar with local, state, and federal tax laws. A professional can help you claim the LLC tax benefits you qualify for, reduce your tax bill, and keep your LLC compliant. Accounting and payroll software can also help with day-to-day records.

Even so, LLC owners still make mistakes. These are the 3 most common.

1. Not saving money for income and self-employment taxes

Owners of LLCs taxed by default generally have to make estimated quarterly payments for income and self-employment tax if they expect to owe $1,000 or more for the year.

If you don’t pay enough or pay late, the IRS may charge an underpayment penalty.

When possible, set aside a little more than you expect to owe in your business account and make your estimated tax payments before each due date.

If you overpay, you’ll get the difference back as a refund or can apply it to next year’s estimated tax. The IRS issues most refunds for e-filed returns within 21 days.

2. Not keeping records

Keep a paper trail. Save receipts, invoices, bank statements, and tax returns, and log every draw and paycheck.

The IRS generally asks you to keep records that support your tax return for at least 3 years, employment tax records for at least 4 years, and records for 7 years if you claim a loss from worthless securities or bad debt.

Your records should also show every draw you take and paycheck you write, with a clear line between personal and business money. Use a separate LLC business bank account for this.

If you mix funds and the LLC is sued, a court might remove your limited liability protection, which is called piercing the corporate veil, and hold you personally liable.

3. Paying yourself the wrong way

Never pay yourself, employees, or contractors in cash. Run everything through your business account by check or bank transfer, so you have a paper trail if you’re ever audited.

Payroll software can automate and record every transaction.

Also match the payment method to your tax status. Owners of an LLC taxed by default aren’t employees, so the LLC shouldn’t put them on payroll or issue them a W-2. They also can’t be treated as their own independent contractors. If your LLC is taxed as an S or C corporation and you work in it, you must be paid through payroll.

Next steps

How you pay yourself depends on how your LLC is taxed.

If you haven’t formed your LLC yet, start there. Then decide how you’d like to be paid and choose the tax status that gives you the best options.

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