How to Pay Yourself From an LLC: 5 Methods Explained

How to pay yourself from an LLC in 5 different ways

LLC owners can pay themselves through a few different methods:

• Owner's draw
• Salary
• Guaranteed payments
• Profit distributions
• Dividends

The best method depends on how your business files taxes, its profitability, and your personal income needs. Pass-through entities typically use draws, guaranteed payments, or distributions, while LLCs taxed as corporations often use salaries and dividends.

Let's take a closer look at each way to pay yourself.

How to pay yourself with distributions

As pass-through entities, multi-member LLCs don't automatically pay corporate taxes. Instead, tax obligations "pass-through" to the business owner through their personal income tax return. The same is true for the following:

• Sole proprietorships
• Partnerships
• Single-member LLCs
• Multi-member LLCs

When deciding how to pay yourself in an LLC, consider taking distributions of business profits each year as personal assets. Each member owns a percentage of the LLC. Year-end distributions of an LLC's profits are made based on that percentage from the business account. For example, if your LLC has $100,000 in profit and you own 50%, you can receive $50,000. This distribution appears on your personal tax return.

It's important to note that receiving a salary and receiving year-end distributions are not mutually exclusive. If you get a paycheck, you're still entitled to your year-end distribution as an LLC member.

How to pay yourself with an owner’s draw

Owner draws work best for single-member LLCs or multi-member LLCs taxed as partnerships. The draw comes from a capital account that holds your initial contribution plus your share of accumulated profits.

Key features of owner draws:

• Flexibility. Set payment frequency in your operating agreement
• No payroll taxes. Eliminates W-2 and W-4 forms
• Self-employment tax. Report income on personal tax return

For example, if you expect your share of LLC profits to be $12,000, you could draw $1,000 monthly. If your actual profit share is $15,000, you'll receive the remaining $3,000 at year-end. Total draws are deducted from your year-end profit distribution.

Here's how to process an owner's draw.

1. Write a check from the LLC to your personal bank account
2. Record the withdrawal as an owner's draw
3. Debit the appropriate amount in your capital account

With this option, there's no need to withhold taxes on distribution payments, meaning there are no W-2 or W-4 (employee withholding) forms to deal with. Instead, you'll report your share of business income on your personal tax return and pay self-employment taxes.

How to pay yourself a salary

A salary is regular compensation paid to LLC members who work in the business and take on operational responsibilities. This method is required for LLCs taxed as C corporations or S corporations—these entity types cannot use owner's draws. Salaries provide consistent income throughout the year, which can be helpful for personal financial planning.

The advantage of acting as an employee of a C corp or S corp is that you can reduce your liability for self-employment taxes by paying yourself a reasonable salary while also receiving some more of your LLC profits as dividends.

What is a reasonable salary? The IRS defines this as the amount someone doing similar work would receive in the same industry and location. If your compensation exceeds this standard, the IRS may reclassify dividends as wages, increasing your self-employment taxes. An LLC member who is an employee can take a bonus, but this must also be reasonable relative to their salary.

However, there are a few potential salary disadvantages for C corps and S corps.

• Payroll compliance: Must file Form W-2, Form 941, Form 940, and state/local payroll tax returns
• Employer taxes: Pay employer's share of Social Security, Medicare, FUTA, SUTA, and workers' compensation
• Administrative burden: Increased record keeping and reporting requirements

How to pay yourself with guaranteed payments

The Internal Revenue Code defines guaranteed payments as compensation for services or capital made to partners regardless of profitability. Unlike owner's draws, which are pre-payments of profit, guaranteed payments function more like a salary. They're also deductible business expenses, which can reduce your LLC's taxable income.

This option works well if you want consistent income without becoming an employee of your LLC. Guaranteed payments are also beneficial for multi-member LLCs that file taxes as partnerships. This is because partners pay self-employment taxes on guaranteed payments in the same way they pay income taxes—meaning they can either deduct or capitalize on a guaranteed payment.

However, there are some tax complications to consider if you pay yourself with guaranteed payments. For example, if your fiscal year doesn't align with the calendar year, guaranteed payments may be included in the following year's tax returns, potentially increasing that year's tax burden.

How to pay yourself dividends

Dividends are payments from C corporation profits remaining after the company pays corporate taxes. While you shouldn't rely entirely on dividends, they can supplement your salary.

The main disadvantage of dividends is that they're subject to "double taxation"—once at the corporate level and again on your personal income tax return. This differs from pass-through entities, where profits are only taxed once on your personal return.

What are the benefits of starting an LLC?

A limited liability company is a simple business structure for small business owners to manage. It offers the same limited liability protection as a corporation without the rigid management. There are no requirements for annual meetings, minutes, or issuing stock certificates. You can decide how you want to run your business and how to distribute business profits and losses. You can also choose how to pay yourself in an LLC to optimize your personal finances and tax savings.

Limited liability companies also offer financial flexibility come tax season because, as a member, you can choose its legal designation for dealings with the IRS. For example, LLCs can choose to report business gains and losses on their individual tax return or on a corporate income tax return. Single-member LLCs are treated as sole proprietorships, and multi-member LLCs are partnerships by default. However, you can also choose to file as an S corporation or C corporation if it's more beneficial for your business. 

How to handle income tax on LLC pay

Your LLC's tax filing requirements depend on your entity structure and the number of members. Here's how each structure handles income taxes.