Can I Pay Myself A Salary From My LLC? A Guide to Getting Paid

If you’ve recently started your own business, especially an LLC, one of your most pressing questions may be, “Can I pay myself a salary from my LLC?” 

This dilemma will depend on several factors, such as the structure of your LLC, how you’ve elected to be taxed, and your overall business goals. This article will break down several ways LLC owners can pay themselves, explain how each approach works, and examine the tax implications. 

The Basics: LLC and Salary

Unlike traditional employees, LLC owners have the unique advantage of choosing how they receive compensation for their work in the business. Depending on how the business is taxed and structured, they can opt for distributions, draws, or guaranteed payments. This flexibility empowers LLC owners to make financial decisions that align with their goals.

That said, there are many ways an LLC owner can receive compensation for their work in the business, and these methods vary based on whether the LLC is treated as a sole proprietorship, partnership, or corporation for tax purposes.

How to Pay Yourself as an LLC Owner

Method #1: Owner’s Draw in a Single-Member LLC

This is the simplest, most common payment method for a single-member LLC. In this arrangement, the LLC is treated as a “disregarded entity” for tax purposes, meaning the owner and the business are considered the same entity by the IRS. The owner then is taxed as a sole proprietor, with business income reported on their personal tax return using Schedule C.

How It Works

An owner’s draw allows the LLC owner to take money directly from the business’s profits. The business does not pay taxes on these withdrawals; instead, the owner pays personal income taxes on the business’s net income.

The LLC owner can transfer funds from the business account to their personal account to take an owner’s draw. There’s no fixed schedule or set amount for these draws, which allows the owner flexibility in how much and how often they pay themselves.

Tax Implications

Although you don’t pay income tax when taking the draw, you will owe self-employment taxes, including Social Security and Medicare contributions. As a sole proprietor, you’ll be responsible for the employer and employee portions of these taxes, totaling 15.3% of the business’s profits.

Method #2: Guaranteed Payments in a Multi-Member LLC

In multi-member LLCs (which are taxed as partnerships), owners often pay themselves through guaranteed payments. These payments are predetermined amounts made to the LLC members regardless of the company’s profitability. Guaranteed payments compensate owners for their active involvement in the business.

How It Works

Guaranteed payments function similarly to a salary, but technically, they’re not wages. Instead, they are treated as business expenses and deducted from the LLC’s income before the net income is distributed among the members. The LLC’s operating agreement typically outlines the terms of guaranteed payments, such as the amount and frequency of these payments.

Because guaranteed payments are made regardless of the company’s profitability, LLC members have a steady and reliable income even if the business experiences fluctuations.

Tax Implications

Guaranteed payments are subject to self-employment tax, just like an owner’s draw in a single-member LLC. The payments are considered ordinary income, so each member reports their share on their personal tax returns using Schedule E. However, these payments are classified as “earned income,” meaning they are subject to income and self-employment taxes.

Method #3: Member’s Draw in a Multi-Member LLC

If a multi-member LLC does not use guaranteed payments, members can take distributions from the company’s profits. This method is similar to an owner’s draw in a single-member LLC, but it applies to each partner in the LLC.

How It Works

As stipulated in the LLC’s operating agreement, members can withdraw money from the company based on their ownership percentage. The timing and amount of the distribution are typically flexible, and partners can take distributions whenever they choose as long as the business has enough profits to cover the withdrawals.

Distributions are not considered wages or subject to self-employment tax, which can benefit members. However, members must be cautious to ensure the business remains financially healthy and has enough cash reserves to continue operations.

Tax Implications

Distributions to LLC members are taxed as ordinary income, as reported on each member’s tax return. Since distributions are not subject to self-employment tax, members will only owe income tax on these payments. However, any income generated by the LLC that is not distributed is still taxable to the members based on their ownership share.

Method #4: Salary in an LLC Taxed as an S Corporation

An LLC that elects to be taxed as an S corporation offers another way for owners to pay themselves: a salary. Unlike other methods, S corporation owners can become employees and receive regular wages for their work, apart from taking distributions from the company’s profits.

How It Works

When an LLC is taxed as an S corporation, the owner must receive “reasonable compensation” for their work in the business. This means the owner must take a salary appropriate for the industry, location, and role they play in the company. The salary is paid through payroll, and the LLC must withhold federal and state income taxes, Social Security, and Medicare contributions, just like it would for any other employee.

After paying themselves a reasonable salary, owners can also take distributions from the company’s remaining profits. These distributions are not subject to self-employment taxes, which can lead to tax savings.

Tax Implications

One key advantage of paying yourself a salary in an S corporation is the potential reduction in self-employment taxes. The owner’s salary is subject to payroll taxes (Social Security and Medicare), but any distributions taken after the salary are not. This structure can significantly lower the overall tax burden, especially for profitable businesses.

However, the IRS scrutinizes S corporation salaries to ensure they are reasonable. If the salary is too low, the IRS may reclassify distributions as wages and impose penalties and back taxes.

Key Takeaway

Whether you choose owner’s draws, guaranteed payments, or a salary depends on your LLC’s structure, profitability, and personal financial goals. In any case, paying yourself from an LLC can be a straightforward process. Consulting a tax expert can ensure you’re paying yourself in the most tax-efficient way and staying compliant with IRS regulations.

At NCH, we are committed to helping business owners set up and manage their LLCs to maximize tax benefits and streamline operations. Let us guide you through structuring your compensation to align with your financial objectives while minimizing tax liabilities.

Call 1-800-508-1729 to learn how we can support your LLC’s financial health and growth.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.