How Do I Pay Myself From My LLC?

As a limited liability company (LLC) owner or entrepreneur, determining the best way to pay yourself isn’t just a paperwork issue—it’s a key part of running a financially sound, tax-compliant business. The method you embrace impacts everything from your take-home pay to your tax bill and even the pace at which your business grows.

The challenge? LLC owners can opt to be taxed in different ways, and each tax structure has its own set of rules. Owner’s draws, guaranteed payments, salaries, and distributions all work differently depending on whether your LLC is treated as a sole proprietorship, partnership, S corporation, or C corporation for tax purposes. 

In this guide, we’ll walk you through how to pay yourself based on your LLC’s tax treatment, the forms you need to use, how to stay compliant with the IRS, and how professional support can help you set - and stick - to a smart compensation strategy.

In this essential guide, we'll walk you through:

• Different ways you can pay yourself as an LLC owner (draws, salaries, guaranteed payments)

• The impact of LLC tax elections

• Determining "reasonable compensation"

• Tax implications

• Compliance requirements

• Financial best practices

As you read, keep in mind that professional guidance for LLC owners, like the affordable, tax-deductible services offered by 1-800Accountant, can simplify these complexities and optimize financial outcomes for your business from launch.

Understanding Your LLC Structure and Its Impact on Pay

The way you choose your LLC to be taxed, not just how it’s formed, determines how you can legally and efficiently pay yourself. Let’s look at how the IRS treats different types of LLCs and what that means for your compensation.

Single-Member LLCs (SMLLCs)

By default, the IRS treats a single-member LLC as a “disregarded entity,” meaning it’s taxed like you're a sole proprietor and still offers liability protection. In this setup, you and your business are considered one entity for tax purposes. An SMLLC owner is known as a member of the LLC.   

You pay yourself through an owner’s draw, which is simply transferring money from your business account to your personal bank account. It’s not considered a salary or business expense, so no taxes are withheld upfront. Instead, you’ll pay income tax and the 15.3% self-employment tax that funds Medicare and Social Security on the business’s net profit when you file your personal tax return.

Accurate bookkeeping is essential in this and many other scenarios. While the draw itself doesn’t show up on your tax return, your LLC's income does - and the IRS expects your records to accurately reflect that information.

Multi-Member LLCs

Multi-member LLCs are generally taxed as partnerships. Like single-member LLCs, owners typically take draws based on their share of the business profits, as outlined in the operating agreement.

There’s also the option of guaranteed payments, which are fixed payments made to members for work or capital contributions, regardless of whether the business turns a profit. These are deductible expenses for the LLC and are reported as self-employment income by the member receiving them.

Because profit-sharing and compensation structures can become complicated in partnerships, having a well-drafted operating agreement and the right tax advisor guiding the process can make a substantial difference.

LLCs Taxed as S Corporations

If you elect S corp status for your LLC, the rules change significantly. Owner-employees must be paid a reasonable salary through payroll, which can be difficult to determine. This salary is subject to Social Security and Medicare taxes, with the business handling standard payroll filings and tax payments.

After paying yourself a reasonable wage, you can take the remaining profits as distributions, which are not subject to self-employment tax. This tax strategy is popular with growing businesses because it can lead to significant savings.

This is a key area where full-service payroll and tax advisory from 1-800Accountant can make an impact, offering significant value in maintaining compliance while optimizing tax savings.

LLCs Taxed as C Corporations – The double taxation consideration

Some LLCs elect to be taxed as C corporations, though it’s a less common selection for small business owners. In this business structure, owners working in the business receive a salary (which is a deductible business expense) and may also receive dividends.

The catch? Double taxation: The business pays corporate income tax on its profits, and you pay personal income tax on dividends. This setup may be beneficial in certain circumstances, but usually calls for professional help for restructuring advice and to manage tax exposure. 

Methods of Paying Yourself from an LLC

Each LLC structure brings its own approach to compensation. Here’s how the most common methods work, along with what the IRS expects from you.

Owner’s Draws

Common for single-member and multi-member LLCs taxed as sole proprietorships or partnerships, owner’s draws are flexible but come with tax responsibilities. To take advantage of an owner's draw, you'll transfer funds from your business to your personal account. There’s no set schedule—you determine when and how much.

Taxes aren’t withheld, so you’ll need to set aside funds and make quarterly estimated payments using IRS Form 1040-ES, Estimated Tax for Individuals. You’ll also pay self-employment tax on your share of the company's profits.

SMLLCs report profits on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Partnerships file IRS Form 1065, U.S. Return of Partnership Income, and each partner receives a Schedule K-1 to report their income on their personal tax return. The draw itself isn’t reported but should be tracked for bookkeeping purposes.

Reasonable Salaries for S Corporation Owners

S corp owners working in the business must pay themselves a reasonable salary through payroll.

What you’d pay someone else for the same work is a great way to zero in on what's reasonable. Factors include: 

• Job duties

• Industry norms

• Time spent working

• Business performance

While the IRS doesn’t offer a fixed formula, you need documentation to support your decision and to avoid attention. Paying yourself too little can trigger IRS scrutiny, and if the IRS reclassifies your distributions as wages, you could owe back taxes and penalties.

Your LLC will issue you IRS Form W-2, Wage and Tax Statement, and handle payroll filings (IRS Form 941, Employer's Quarterly Federal Tax Return, and IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return). A payroll provider can automate this task, helping to ensure compliance.

Distributions: Profits Beyond Salary (for S Corps)

Once your reasonable salary is paid, the remaining profits can be taken as distributions. Your S corp distributions are not subject to self-employment taxes, which fund Social Security and Medicare, but are subject to federal income tax, making them more tax-efficient than a salary.

Distributions are reported on your Schedule K-1 (Form 1120-S) and are generally tax-free until you exceed your stock basis. It's important to determine and pay yourself a reasonable salary before you begin taking distributions. Adhering to this order will help you avoid IRS penalties.

Guaranteed Payments: For Partnerships and Multi-Member LLCs

Guaranteed payments are fixed amounts paid to partners for their services or capital contributions, regardless of business profits. Set in the operating agreement, guaranteed payments are made even when profits are low or negative.

While guaranteed payments may seem similar to an owner's draw, there are some key differences. For example, while guaranteed payments are contractual and fixed, owner's draws are flexible and depend on profits. These payments are considered business expenses, while draws aren't. 

Guaranteed payments are deductible for your business and are treated as self-employment income for the recipient. The LLC reports them on IRS Form 1065, U.S. Return of Partnership Income, and members report them via Schedule K-1 and their personal tax returns.

Tax Implications and Compliance Essentials

Every payment method has its own tax treatment—and its own consequences if mishandled. Here’s what to keep in mind.

Self-Employment Taxes and Owner’s Draws

If you’re taking draws from an SMLLC or partnership, you’re responsible for paying self-employment taxes on the business’s net income. 

That means staying on top of quarterly estimated tax payments to avoid penalties, a process that tax advisory and quarterly estimated tax preparation services can simplify.

Payroll Taxes and S Corp Salaries

The reasonable salaries paid to S corp owners are subject to payroll taxes, including: 

• FICA

• FUTA

• State unemployment

Your LLC must split FICA contributions and handle payroll filings, which can be complex. Using a full-service payroll provider, such as 1-800Accountant, ensures that calculations, withholdings, and reporting are handled correctly and submitted by the deadline.

Strategic Tax Election to Avoid Double Taxation

Pass-through entity taxation, a feature of many entities including sole proprietorships, partnerships, S corps, helps business income get taxed once—on your personal return. 

By contrast, C corps face double taxation, which isn't optimal for every business type. Professional tax advice can help identify the best business entity, such as an S corp election, which is a more strategic fit for many small businesses seeking tax efficiency.

Maintaining Accurate Financial Records

No matter how your LLC is taxed, detailed bookkeeping is non-negotiable. Bookkeeping is the foundation for:

• Filing taxes

• Justifying your compensation

• Staying audit-ready

Good records also help you make smart financial decisions and optimize your pay strategy over time, but recordkeeping is a tedious and time-consuming task. Professional, full-service bookkeeping solutions, like those offered by 1-800Accoutant, provide accurate, up-to-date financial data, forming the backbone of sound payment strategies.

Operating Agreement for Multi-Member LLCs

Your business's operating agreement should clearly define:

• How an LLC's profits will be distributed

• When guaranteed payments are made

• How compensation decisions are handled

This clarity prevents confusion and supports compliance throughout the life of your LLC. 

Financial Planning and Best Practices for Owner Compensation

Paying yourself isn’t just about taxes—it’s part of a broader strategy for the long-term success of your business.

Balancing Personal Income Needs with Business Reinvestment

You need to get paid, but your business needs capital and reinvestment to grow. Use budgeting to strike a balance between paying yourself and leaving enough in the business to fund:

• Operations

• Marketing

• Long-term expansion

Setting a Consistent Pay Schedule

Even if you’re taking draws that don't require scheduling, a regular pay schedule can help your business with:

• Cash flow

• Personal financial planning

For S corps, payroll naturally enforces payment consistency.

Planning for Quarterly Estimated Tax Payments

If you’re not on payroll, remember: no one is withholding taxes for you. Set aside a portion of your income regularly and use IRS Form 1040-ES to make estimated payments each quarter. A tax advisor can help you calculate these payments accurately.

If you're taking owner's draws or distributions, it's essential to set aside a portion of these funds for quarterly estimated tax payments. As a rule, if you’re not on payroll, no one is withholding taxes for you.

These calculations and payments must be submitted four times per year, with underpayments and missed deadlines inviting IRS scrutiny. Year-round tax support from the experts at 1-800Accountant can help your business accurately calculate and submit these payments, avoiding underpayment penalties.

Documenting Your Compensation Decisions (Especially for S Corps)

For business owners, particularly S corp owners, documentation is your best defense. Keep records of:

• Salary benchmarks

• Job duties

• The financial reasoning behind your pay level

This can help if the IRS ever questions whether your compensation was “reasonable," and reflects the emerging trend of pay transparency and robust documentation.

Leveraging Professional Expertise for Optimal Payment Strategy

You don’t have to figure all of this out on your own. In fact, a little expert support can save you a lot of money—and stress.

When to seek professional advice: Navigating complexity with confidence

Consider working with a CPA or tax professional when:

• Choosing your LLC’s tax election

• Determining a reasonable salary for S corp owners

• Drafting or updating your operating agreement

• Managing complex partner compensation structures

A tax advisor with experience in your industry and state can tailor guidance to your unique business tax situation.

Integrated Financial Services: Streamlining Pay, Taxes, and Bookkeeping

Using a single financial provider's integrated financial services for bookkeeping, payroll, and tax preparation helps ensure they're working together like a well-oiled machine. The benefits of integrated services include: 

• Reducing the risk of errors

• Saving time

• Simplifying compliance 

• Providing a complete picture of your business’s financial health

Proactive Tax Planning: Beyond Year-End Filing

How you pay yourself affects your tax planning strategy all year—not just at tax time or at the end of the year. Year-round support helps you:

• Stay compliant

• Avoid underpayment penalties

• Seize opportunities for tax savings

Audit Defense: Preparing for and Responding to IRS Inquiries

If you’re ever audited due to an issue with a reasonable salary or for anything else, having professional support and clear documentation can make all the difference. 

Audit defense services can help ensure your compensation practices can stand up to scrutiny.

Conclusion: Paying Yourself Correctly for Long-Term Success

How—and how much—you pay yourself as an LLC owner is more than a financial decision. It’s a compliance issue, a tax strategy, and a reflection of your long-term business goals.

Understanding your options, documenting your decisions, and working with experts where needed helps you stay on the right side of the IRS while building a business that pays off.

It's a recommended practice to periodically assess the payroll process your LLC has embraced. When you feel it's too complex and time-consuming, it's time to consider seeking expert guidance to ensure you are: 

• Optimizing your compensation strategy

• Minimizing your business tax burden

• Maintaining full compliance

Ready to review your pay structure or set one up the right way from the start? Schedule a free 30-minute consultation with 1-800Accountant, America's leading virtual accounting firm, to get expert guidance on owner compensation, taxes, and financial strategy, ensuring a minimal tax burden while maintaining compliance.