How you pay yourself from an LLC depends on how your company is taxed. A single-member LLC treated as a disregarded entity uses owner’s draws. A multi-member LLC taxed as a partnership uses distributions and sometimes guaranteed payments. And an LLC that has elected S-corp tax treatment requires you to run payroll and pay yourself a salary before taking additional distributions. Each method has different tax consequences and paperwork requirements.
Single-Member LLC: Owner’s Draws
If you’re the sole owner of an LLC and haven’t elected corporate tax treatment, the IRS treats your business as a “disregarded entity.” That means the LLC doesn’t file its own income tax return. Instead, all profits and losses flow directly to your personal Form 1040, reported on Schedule C. You pay income tax and self-employment tax on the business’s net profit whether or not you actually transfer money to yourself.
Because of that pass-through treatment, paying yourself is straightforward: you simply transfer money from your business bank account to your personal bank account. This transfer is called an owner’s draw. It’s not a tax event in itself. You don’t withhold income tax or payroll tax from the draw. Your tax obligation is based on the business’s annual profit, not on how much you moved to your personal account.
The self-employment tax rate is 15.3%, covering both the employer and employee portions of Social Security (12.4%) and Medicare (2.9%). That applies to your net earnings from the business. The Social Security portion phases out above the annual wage base (the 2024 threshold was $168,600), but the Medicare portion applies to all net earnings with no cap. You’ll typically pay these taxes through quarterly estimated payments to the IRS using Form 1040-ES.
How to Document Owner’s Draws
Even though an owner’s draw is simple mechanically, you need clean records to maintain the legal separation between you and your LLC. That separation is what gives you personal liability protection. Here’s what good documentation looks like:
- Separate bank accounts. Keep a dedicated business checking account. Never pay personal expenses directly from the business account or deposit personal income into it.
- Consistent transfers. Move money to your personal account on a regular schedule, whether that’s weekly, biweekly, or monthly. Label each transfer as an owner’s draw in your bookkeeping software.
- An equity account in your books. Track draws in an owner’s equity or owner’s draw account. Each draw reduces your equity in the business, and each profit allocation increases it.
- Operating agreement provisions. Your operating agreement should address how and when you can take draws. Most state statutes prohibit distributions that would make the LLC insolvent, meaning your liabilities would exceed your assets after the draw.
If you have outstanding business loans, review the terms before taking large draws. Some lenders include covenants that restrict owner distributions, and violating those terms could trigger a default.
Multi-Member LLC: Distributions and Guaranteed Payments
A multi-member LLC is taxed as a partnership by default. The partnership itself doesn’t pay income tax. Instead, each member reports their share of the profits on their personal return, based on the allocation percentages in the operating agreement. The partnership files an informational return (Form 1065) and issues each member a Schedule K-1 showing their share of income, deductions, and credits.
Members typically receive money from the LLC in two ways: distributions and guaranteed payments.
Distributions
Distributions are payments from the LLC’s available cash, divided according to each member’s ownership percentage (or whatever allocation the operating agreement specifies). Like single-member draws, distributions are not separately taxable events. You owe tax on your full distributive share of partnership income regardless of whether cash is actually distributed. A distribution generally only creates a taxable gain if the cash you receive exceeds your adjusted basis (your running investment) in the partnership.
Guaranteed Payments
Guaranteed payments work differently. These are fixed payments made to a member for services they perform or capital they provide, determined without regard to the partnership’s income. Think of them like a salary: a managing partner might receive $8,000 per month for running daily operations, paid whether the business is profitable or not.
The partnership deducts guaranteed payments as a business expense on Form 1065. The receiving partner reports them as ordinary income on Schedule E. No income tax is withheld from guaranteed payments, so the partner receiving them needs to make quarterly estimated tax payments. These payments are also subject to self-employment tax.
The key distinction: guaranteed payments reduce the partnership’s overall income before the remaining profit gets split among members. If your LLC earns $200,000 and pays one partner $60,000 in guaranteed payments, the remaining $140,000 is divided based on ownership percentages. The partner who received the guaranteed payment also gets their share of that $140,000.
LLC Taxed as an S-Corp: Salary Plus Distributions
If your LLC has elected S-corp tax status by filing Form 2553 with the IRS, you must pay yourself a reasonable salary through payroll before taking any additional money as distributions. This is the one scenario where you cannot simply write yourself a check from the business account.
The salary is subject to standard payroll taxes: the business pays the employer half of Social Security and Medicare (7.65%), and you pay the employee half (7.65%), for a combined 15.3% on wages up to the Social Security wage base. The advantage of the S-corp structure is that distributions taken on top of your salary are not subject to self-employment tax. You still owe income tax on distributions, but avoiding the 15.3% self-employment tax on that portion can mean significant savings for profitable businesses.
What Counts as Reasonable Compensation
The IRS scrutinizes S-corp owners who pay themselves artificially low salaries to minimize payroll taxes. There’s no single formula for “reasonable compensation,” but the IRS evaluates several factors:
- Your training and experience. Education level, certifications, professional licenses, and years in the industry.
- Your duties. Day-to-day tasks, management responsibilities, client relationships, and strategic planning.
- Time devoted. Whether you work full-time or part-time, and your typical weekly hours.
- Comparable pay. What similar businesses pay for similar roles. Salary surveys and job listings for your industry and region are useful benchmarks.
- Business profitability. Revenue, profit margins, and how much of the profit is directly tied to your work.
- Distribution history. The ratio of salary to distributions over time. A pattern of minimal salary and large distributions raises red flags.
The standard the IRS applies is simple in principle: what would you pay an unrelated employee to do your job? If you’re a consultant generating $300,000 in revenue and paying yourself a $30,000 salary, that’s going to attract scrutiny. A more defensible approach is researching market salaries for your role and setting your compensation within that range.
Running Payroll for an S-Corp
Once you’ve set your salary, you need to run actual payroll. That means withholding federal and state income tax, Social Security, and Medicare from each paycheck, then remitting those withholdings to the IRS and your state tax agency on the required schedule. You’ll also need to file Form 941 quarterly and issue yourself a W-2 at year end.
Most LLC owners use a payroll service to handle this. Costs typically range from $30 to $150 per month depending on the provider and features. Running payroll manually is possible but error-prone, and late or incorrect payroll tax deposits trigger penalties quickly.
After paying your salary, any remaining profit can be distributed to you without additional payroll tax. These distributions get reported on Schedule K-1, similar to a partnership. You’ll still owe income tax on them, but the payroll tax savings on distributions is the core financial benefit of the S-corp election.
Choosing the Right Payment Method
Your tax classification determines your payment method, not the other way around. A single-member LLC that earns $50,000 a year probably doesn’t benefit from electing S-corp status because the payroll costs and additional filing requirements eat into any tax savings. As a rough benchmark, many tax professionals suggest the S-corp election starts making financial sense when your business consistently nets $60,000 to $80,000 or more in annual profit, though the exact threshold depends on your specific situation.
Whatever method you use, the fundamentals stay the same. Keep business and personal finances completely separate. Document every payment. Set aside money for quarterly estimated taxes if you’re not withholding through payroll. And make sure your operating agreement spells out how and when distributions happen, especially if you have business partners.