Running a Limited Liability Company (LLC) is a smart move for many business owners. It offers flexibility, personal liability protection, and a simple operating structure.
However, one of the most common questions business owners ask is:
“How do I pay myself from my LLC?”
The answer depends on how your LLC is structured and the tax rules that apply.
Many entrepreneurs mistakenly believe forming an LLC will automatically save them money on taxes. The reality is different. While an LLC does provide a legal separation between personal and business assets, helping shield your personal wealth from lawsuits and creditors, it does not (by itself) offer tax savings.
What truly impacts your tax liability is how you operate your business and how you manage your business finances. Let’s look at the best practices and the reality of paying yourself inside the LLC entity structure together – shall we?
Separating Business and Personal Finances
The first and most important step in paying yourself from your LLC is to ensure that your business is financially structured as a separate entity from your personal finances. This separation protects your personal assets and strengthens your credibility as a business owner.
It all begins with obtaining an Employer Identification Number (EIN) from the IRS. This number acts like a Social Security Number for your business and should be tied to all official transactions, from tax filings to bank accounts.
With an EIN in place, you can then open a dedicated business bank account. Keeping business funds separate from personal funds is crucial. Failing to do so (often referred to as commingling of funds) can lead to legal and tax issues, potentially undermining your LLC’s liability protection. This is what the legal professionals refer to as being able to pierce the corporate veil. You, as the owner, didn’t operate the business as a separate entity, and the liability protection is therefore null and void (in many cases).
Another smart move is securing a business credit/debit card. Using this for company expenses helps streamline bookkeeping, track deductions, and build business credit.
The Role of Bookkeeping in How You Pay Yourself
Establishing a strong bookkeeping system is essential for making informed financial decisions. Whether you choose QuickBooks, Xero, or another platform, keeping accurate records ensures that all income and expenses are tracked.
Good bookkeeping not only keeps the IRS happy but also helps when applying for business credit, attracting investors, and understanding your company’s financial health. A business that operates without well-maintained books is like driving a car with a broken speedometer… you may be moving, but you won’t know how fast or in what direction.
Understanding how your LLC’s revenue flows makes it easier to determine how much you can pay yourself. The most straightforward formula to keep in mind is:
Total Revenue – Business Expenses = Profit
That profit is what ultimately determines what you, as the owner, take home.
How You Pay Yourself as a Single-Member LLC
If you’re the sole owner of an LLC, the IRS classifies your business as a disregarded entity for tax purposes. That means all profits flow directly to your personal tax return, reported on Schedule C of your Form 1040. There’s no separate business tax return required, making it one of the most straightforward tax structures.
In this scenario, the money you take from your business is called an owner’s draw. You’re not considered an employee of your LLC, so you don’t receive a traditional paycheck. Instead, you transfer money from your business account to your personal account as needed.
However, these draws are not tax-free. They are still subject to income tax and self-employment tax (FICA), which covers Social Security and Medicare contributions. As I write this article, FICA for a self-employed individual is 15.3%… which, if you think about it, is quite a lot once you start making some serious money in your business.
This means planning is crucial. Without an employer withholding taxes on your behalf (which is what happens in a “regular” W-2 job scenario), quarterly estimated tax payments to the IRS are necessary to avoid penalties. Many new business owners make the mistake of taking money out of the business without setting aside enough for taxes, leading to unexpected tax bills.
A strategic approach of setting aside a percentage of profits for taxes each time you take a draw can prevent costly surprises.
Paying Yourself as a Multi-Member LLC
In a multi-member LLC, income is divided among the members based on the operating agreement. Each owner receives a share of the profits, which is reported on a Schedule K-1, and then added to their personal tax returns. Similar to a single-member LLC, these earnings are subject to both income and self-employment tax.
Unlike a corporation, members of an LLC don’t receive paychecks or W-2s. Instead, the business would distribute profits as draws throughout the year. While these distributions aren’t taxed at the time they’re taken, they must be reported as income.
Without proper planning, members can end up with a significant tax burden at the end of the year, so it is again crucial to account for (and make) quarterly tax payments to the IRS.
What About S-Corporations?
For LLCs that reach a certain level of profitability, electing S-Corporation status can lead to significant tax savings. By default, LLC profits are subject to self-employment taxes, but with an S-Corp election, owners can pay themselves a reasonable salary and take additional income as distributions.
The key benefit, you ask? While salary is subject to payroll taxes, distributions are not subject to self-employment tax, potentially saving thousands in taxes annually.
However, there’s a catch. Setting that salary too low to avoid payroll taxes can trigger IRS scrutiny in the form of an audit. Once the IRS starts looking into a reasonable compensation issue, in my experience, chances are very high that the level of salary to contribution is going to be questioned. Even with some of the best documentation and arguments in the world, the IRS has a stringent policy for this… and with good reason. This is one of the areas where entrepreneurs file the most frivolous returns – according to the IRS.
The best approach is to consult a tax strategist who can determine the optimal balance between salary and distributions based on industry standards and company revenue.
If you haven’t read my article about S-Corps, you can find it >> HERE <<.
The Importance of Tax Planning
Regardless of how your LLC is structured, tax planning is the single most effective tool in maximizing profits and avoiding unnecessary tax burdens. Without a clear plan, many business owners take draws without realizing the tax consequences, leading to financial strain when tax season arrives.
To stay ahead, it’s essential to set aside a portion of all draws for tax obligations, track expenses diligently, and consider working with a tax professional who understands the complexities of LLC taxation. Those who plan proactively are often the ones who keep more of their hard-earned money while staying compliant with IRS regulations.
Final Thoughts
Paying yourself as an LLC owner isn’t as simple as withdrawing money from your business account. How you structure your payments, whether as an owner’s draw, salary, or S-Corp distributions, can significantly impact your tax liability.
Separating business and personal finances, maintaining clear financial records, and making strategic tax decisions are the keys to protecting your business and maximizing your income.
Welcome to the New Age of Accounting. Let’s begin.
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
