How to Pay Yourself From an LLC

How do LLC owners pay themselves?

The payment method follows the LLC's federal tax classification. An individual who owns a disregarded single-member LLC takes a draw; members of an LLC taxed as a partnership take distributions or, when the arrangement qualifies, guaranteed payments (IRS: LLC classifications; IRS: Publication 541).

Any LLC may instead elect corporate treatment on Form 8832, signed by each member or an authorized member or manager and generally effective no earlier than 75 days before filing, or S corporation treatment on Form 2553 (IRS: LLC classifications). Membership changes flip the answer too: a disregarded LLC becomes a partnership when a second member joins, and a partnership LLC becomes disregarded at one member (eCFR: 26 CFR 301.7701-3(f)(2)). Confirm the classification before setting up owner payments; how LLCs are taxed explains the elections. A spouse-owned LLC can have a different classification question; see spouse and family LLCs.

Can I pay myself a salary or W-2 wages from my LLC?

An individual owner of a disregarded single-member LLC cannot be the LLC's W-2 employee for their own services. The employment-tax rule treats the LLC as separate when it employs other people, but expressly says it is not its owner's employer (eCFR: 26 CFR 301.7701-2(c)(2)(iv)(C)(2); IRS: Publication 3402). Do not put the owner's draw through payroll or issue the owner a W-2 for it.

Members working for an LLC taxed as a partnership are self-employed partners, not employees paid on a W-2, even when the work is for a single-member LLC the partnership owns (eCFR: 26 CFR 301.7701-2(c)(2)(iv)(C)(2)). A partnership uses Schedule K-1 for distributions and guaranteed payments (IRS: Paying yourself; IRS: partners and self-employment). An LLC taxed as an S corporation has different owner salary rules. If you are considering that election, see whether to elect S corporation status.

Is an owner's draw taxed or deductible?

A draw from a disregarded single-member LLC is a transfer of the owner's money, not a deductible business expense or a second taxable payment. The owner reports the LLC's business income and deductions on their return whether they withdraw the cash or leave it in the business (IRS: single-member LLCs).

For a partnership-taxed LLC, an ordinary distribution generally does not change a member's allocated share of income and is not a partnership deduction. It usually reduces the member's tax basis instead; an exception applies when cash received exceeds that basis (IRS: Publication 541). Do not label personal spending as a business expense just because the LLC paid it.

How much self-employment tax applies to LLC profit?

An individual owner of a disregarded LLC that runs a trade or business generally pays self-employment tax on net earnings from that business, even if no draw is taken. Schedule SE and self-employment tax generally apply when net self-employment earnings reach $400. The combined rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare (IRS: self-employment tax).

Ordinary real estate rent is generally excluded from self-employment earnings; dealer activity or significant services to renters can change that. See rental property taxes (IRS: Schedule SE; IRS: Schedule E).

Schedule SE generally starts with 92.35% of net self-employment profit. The Social Security part stops at $184,500 of combined wages and self-employment earnings for the page's tax year; the Medicare part has no wage-base cap (IRS: Form 1040-ES). Income tax is separate, so the combined rate is not your total tax rate. Additional Medicare Tax may also apply when wages and self-employment income exceed the filing-status threshold (IRS: Additional Medicare Tax). The return may also deduct the employer-equivalent part of self-employment tax when computing adjusted gross income (IRS: self-employment tax).

For partnership-taxed LLCs, a member who does not qualify as a limited partner generally includes their share of ordinary business income and guaranteed payments in net self-employment earnings. A qualifying limited partner generally includes only guaranteed payments for services. Whether an LLC member qualifies is decided under section 1402(a)(13) and depends on the facts; an LLC title, or limited-partner treatment for other tax purposes, does not settle it (IRS: partners and self-employment; IRS: Form 1065 instructions).

Do I need quarterly estimated tax payments?

You generally need estimated payments if you expect to owe at least $1,000 after withholding and refundable credits, and your withholding and refundable credits will be less than the smaller applicable target below. This covers income and self-employment tax for sole owners and partners (IRS: Publication 505; IRS: Form 1040-ES).

To generally avoid an estimated-tax underpayment penalty, pay the smaller applicable target through withholding and timely installments. Any remaining tax is still due with the return. Farming, fishing, a prior year with no tax liability, and uneven income can change the calculation (IRS: Publication 505). Use Form 1040-ES to estimate the tax. For a calendar year, installments are due April 15, June 15, September 15 and January 15 of the next year, or the next business day after a weekend or legal holiday. A draw does not itself set the estimated payment; projected taxable profit does.

How does a multi-member LLC pay its members?

A partnership-taxed LLC may distribute cash against a member's ownership interest. It may also promise a member an amount for work or use of capital that does not depend on whether the LLC earns a profit. That is a guaranteed payment and can be owed even in a loss year. Check the operating agreement and payment terms before classifying a transfer (IRS: Publication 541).

A regular transfer is not automatically a guaranteed payment. Check the agreement and how the amount is calculated. A payment tied to profit may instead be a distribution or allocation of income, with a different result (IRS: Publication 541). The partnership tax guide covers Form 1065 and allocations.

How are guaranteed payments taxed and shown on Schedule K-1?

An individual member includes guaranteed payments in ordinary income even if the LLC has a loss. The LLC generally deducts a qualifying payment for services or capital in computing partnership income; it is not employee pay and has no wage withholding (IRS: Publication 541). Guaranteed payments, for services or capital, are generally not qualified business income for the section 199A deduction, while an allocated share of business profit can be (US Code: 26 USC 199A(c)(4); eCFR: 26 CFR 1.199A-3).

Schedule K-1 shows guaranteed payments for services in box 4a and for capital in box 4b. Box 4c is their total, not another payment to add; box 19 reports distributions separately. Ordinary business income or loss appears in box 1; self-employment earnings information appears in box 14. The member reports guaranteed payments on Schedule E and generally figures any self-employment tax on Schedule SE (IRS: K-1 instructions; IRS: partners and self-employment).

What if I take out more than my share of profit?

Taking more than this year's profit is not automatically taxable. For a partner, cash distributions above adjusted basis, the running tax balance in the partnership interest, generally create gain. Cash drawn against the year's earnings counts as distributed on the year's last day, after that year's income share has raised basis (IRS: Publication 541; IRS: K-1 instructions). Check the agreement before classifying the transfer; see how partnerships are taxed for the basis and K-1 rules.

For a sole owner of a disregarded LLC, there is no separate partnership share to exceed. A cash draw greater than current profit is still a draw, but the owner must leave enough cash for business obligations and taxes.

How should I record draws and separate business money?

Move a draw or distribution from the LLC bank account to your personal account and label it as an owner-equity transaction, not a wage or operating expense. Record the date, amount, recipient, and whether it was a draw, distribution, guaranteed payment, repayment, or reimbursement. Keep the operating agreement and support for any guaranteed payment or member loan.

The IRS recommends a business checking account separate from a personal account, using the business account for business purposes, identifying deposits and expenses, and reconciling the account monthly (IRS: Publication 583). For a partnership, track each member's distributions and tax basis separately. Before choosing a withdrawal amount, review profit to date, cash needed for bills, estimated tax already paid, and the agreement's payment terms.

Example

Illustrative amounts are in US dollars. A two-member LLC taxed as a partnership earns $120,000 of revenue and has $40,000 of outside expenses. Its agreement gives the working member a $20,000 guaranteed payment for services, then splits the remaining $60,000 of ordinary profit equally. The working member receives another $15,000 as a distribution; the other member receives a $10,000 distribution.

The working member reports $20,000 of guaranteed payment plus $30,000 of allocated ordinary profit. The other member reports $30,000 of allocated ordinary profit. Neither adds the distributions to that profit merely because cash was transferred. The LLC records the $20,000 payment separately from the $15,000 distribution. If both distributions were drawn against this year's profit, they count at year-end, after each member's $30,000 profit share has raised basis, so neither generally creates gain. If the working member does not qualify as a limited partner and has no other wages or self-employment income, regular self-employment tax is about $7,065: $50,000 × 92.35% × 15.3% (IRS: Publication 505). The other member's tax depends on that member's status and other earnings.

Different for you?

• Your LLC elected S corporation treatment: see S corporation owner salary and whether to make the election.
• Your spouse or family owns part of the LLC: confirm its classification in spouse and family LLCs.
• The LLC pays an owner's health insurance: see health insurance for owners.
• You want to pay a child through the LLC: see hiring your children.
• You live outside the US: see paying yourself as a foreign owner. If you live in Canada, see paying yourself from a US company.
• A member is a foreign partner for US tax purposes: the LLC may need to withhold on that member's share of US business income even if it distributes no cash. See foreign partner withholding (IRS: partnerships with foreign partners).
• Your records are behind or member payments were mixed with expenses: gather bank statements, the operating agreement, profit records, draw history, basis information, and estimated payments. See catching up on overdue books or get bookkeeping help.
• Your LLC operates in California: state LLC taxes and fees can apply alongside federal tax; see California minimum tax and LLC fee.