How you pay yourself from an LLC depends on two things: how many members your LLC has, and how it's taxed.
By default, the IRS taxes a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership. You can also elect to have your LLC taxed as an S corporation or C corporation. Each option changes how you receive income and what taxes apply.
Here's what you need to know.
Getting paid as a single-member LLC
If you're the only member of your LLC, you don't receive a traditional salary. Instead, you take what's called an "owner's draw," which means you withdraw money from your business profits for personal use.
To do this, write yourself a business check or transfer funds from your LLC’s bank account to your personal bank account.
Keep in mind: your business is still taxed on all its profits for the year, regardless of how much you draw. Also keep in mind that the withdrawal is not salary and is not deductible by your LLC.
Tax requirements
Because you're not classified as an employee, Social Security and Medicare taxes aren't withheld from your draw. Instead, you report and pay self-employment taxes directly. You'll report all profits and losses on Schedule C.
If you elect corporation status, the rules change. You can pay yourself a reasonable salary as an employee, and the business withholds income taxes, Social Security, and Medicare on your behalf.
Getting paid as a multi-member LLC
In a multi-member LLC, each member has a capital account. You get paid by taking a draw from that account, typically by business check.
Members can also receive guaranteed payments, which are fixed payments made regardless of whether the LLC turned a profit that period. This gives each member predictable income even during slower months.
Your LLC's written operating agreement should spell out how payments are distributed, how often distributions are made, and whether a member vote is required. Without these provisions, your state's default LLC rules apply. Don't skip this step.
Tax requirements
If your LLC is taxed as a partnership, all income flows through to members. The LLC files Form 1065 to report business income and expenses. Each member then reports their share of income on Schedule K-1 and pays income taxes accordingly. Members who actively work in the business must also pay self-employment taxes on their share.
Can an LLC member be an employee?
Not under the default tax rules. Members aren't classified as employees unless the LLC elects to be taxed as a corporation.
If you make that election, an active member can receive a salary as an employee. The LLC pays taxes directly to the IRS, and members report wages, salaries, and dividends on their personal returns.
Are there tax benefits to electing corporation status?
There can be. Two options are worth knowing:
- S corporation: May reduce self-employment taxes if the LLC runs an active business and payroll taxes are high. Only the salary paid to the member as an employee is subject to payroll taxes. Additional distributions are not. LLCs that choose to be taxed as an S corporation generally do so because of the self-employment tax advantages. Keep in mind, however, that the Internal Revenue Code has strict requirements that must be met before S corporation status can be elected.
- C corporation: May reduce taxes if the corporate tax rate is lower than the members' personal rate, or if the LLC isn't planning to make distributions of its profits. In practice, however, most LLCs choose either the default tax classification or the S Corporation option.
Both options come with added complexity, so consult a tax professional before making either election.
A note on pass-through taxation
One of the main reasons small business owners choose an LLC is pass-through taxation. This means the LLC's income, losses, deductions, and credits flow directly to the members. The LLC itself doesn't pay federal income tax, unless it elects C corporation status.
That said, pass-through status doesn't remove all tax obligations. Multi-member LLCs must still file an informational return with the IRS. Depending on where you operate, your LLC may also owe state or local taxes and need to file additional returns.
The right payment structure depends on your goals, your business activity, and how your LLC is set up.