How to Pay Yourself From an LLC

You’ve formed an LLC and you’re making money. That’s great news, but it begs the question: How do you pay yourself as an LLC? Do you just write out a check? Or do you pay yourself a salary, deduct employment taxes, and give yourself a paycheck? The answer depends on how your LLC is structured for tax purposes.

Here are the three most common ways owners pay themselves in an LLC.

Write a check to yourself from profits

When you form a limited liability company (LLC), by default, for tax purposes, the IRS treats the LLC like a sole proprietorship or partnership. It considers the LLC a “disregarded entity” which is also known as a “pass-through” business. The profits and taxes due pass through to the individual business owners’ personal tax returns. (Owners of an LLC are called members.)

Under these circumstances, to pay yourself as an LLC owner, you don’t get a salary or a paycheck. If you’re a one-member LLC, you just withdraw money from the LLC bank account and deposit it in your personal account whenever you want. This is called an owner’s draw, or just a draw.

The LLC doesn’t withhold any taxes and doesn’t get a deduction for the profits you withdraw. The business income and expenses are reported on your personal tax return at the end of the year.

All the LLC’s annual profits, whether you’ve withdrawn the money or not, passes through to your personal tax return. For example, if your one-person LLC has profit of $175,000 for the year, you have to pay income taxes and self-employment taxes (Social Security and Medicare) on the entire $175,000 even if you only take $90,000 out as an owner’s draw.

In a multi-member LLC, profits are distributed among all the members based on terms spelled out in the operating agreement. Each member pays income taxes and self-employment taxes on their share of profits.

Pay yourself a salary as an employee

Although the passthrough business status (also called a disregarded entity) is the default way the IRS treats LLCs, there is another option for paying yourself from an LLC. The LLC can elect to be treated like an S corporation (S corp) for tax purposes. In that case, you and any other members who work in the LLC become employees of your LLC and get a regular paycheck like any wage earner. The LLC withholds taxes, pays the employer’s half of FICA (Social Security and Medicare), and gets to deduct all payroll costs as a business expense.  

Split your earnings between salary and profit distribution

If the LLC has opted to be treated as an S corporation for taxes, then there’s another way you can take money out of the company: You can split your pay between salary and profit distribution to reduce self-employment taxes.  

Dividing your income between salary and profit distribution reduces the self-employment taxes (Social Security and Medicare) because S corp profit distributions are not subject to self-employment taxes. Thus, if your LLC has $175,000 in profits, you might take $90,000 as a salary and $85,000 as a distribution of profits. You have income taxes, Social Security, and Medicare taxes withheld from the $90,000 salary. You will still have to pay income taxes on the $85,00 distribution, but you won’t have to pay any self-employment tax on it. That can be a huge savings. Here’s how it works out.

Social Security and Medicare Savings with an S Corporation Election

One-Member LLC Yearly Profit = $175,000

Owner Savings: $13,005($26,775 – $13,770)

Reasonable Salary Rule

One caveat: The IRS requires you to pay yourself a reasonable salary. In other words, a salary that’s at least average for your position and industry. Avoiding taxes by taking too much as a distribution can result in having to pay back taxes plus penalties.

Be an independent contractor to your LLC

Technically, you could get paid from your LLC by working for it as an independent contractor. But it’s not a practical option. It results in more paperwork without saving you any taxes.

If you bill your LLC as an independent contractor, the LLC will have to file form 1099-NEC with the IRS and issue a copy of it to you. Although the business gets to deduct the amount it pays you from its profits, you still pay income taxes and self-employment on the 1099-NEC income. So, you don’t save anything.