Understanding how to pay yourself as a business owner with an LLC can be crucial to both your personal and business financial success. 

Starting a business can be a daunting task, but choosing the right business structure can make all the difference. A popular option for many entrepreneurs is a limited liability company, or LLC. An LLC is a type of business structure that provides personal liability protection to business owners while also offering flexibility in terms of taxation.

“An LLC offers extraordinary flexibility in the ability to allocate profits and losses to members in varying amounts,” writes attorney Garrett Sutton, author of Veil Not Fail: Protecting Your Personal Assets from Business Attacks.

But LLC’s can be taxed in different ways, and you must understand how to choose the right taxation method, determine your compensation method, and meet payroll tax deadlines. In this step-by-step guide, we’ll walk you through the process of paying yourself as an LLC.

What Is an LLC?

An LLC is a legal entity that’s separate from its owners and, if properly maintained, can provide asset protection benefits. LLCs are popular among small business owners because they are relatively easy to set up and maintain. 

LLCs are owned by their members, who can be individuals, corporations, or other LLCs. The members of an LLC are not personally liable for the debts or obligations of the business. This means that if the LLC is sued or goes into debt, the personal assets of the owner are often protected. 

It’s important to note that if the LLC is not properly maintained, it is possible for the “veil to be pierced”, resulting in personal liability. In addition, some lenders require personal guarantees from LLC members who take out a small business loan.

Benefits of an LLC Structure

One of the primary benefits of an LLC structure is that it offers liability protection to business owners. If the LLC gets sued or goes into debt it can’t pay back, the owners’ personal assets are typically protected.

Another benefit of an LLC structure is that it offers more flexibility when it comes to taxation than other forms of business structures. LLCs aren’t taxed as a separate entity from their owners. Instead, the income and losses of the LLC are passed through to the individual owners who report it on their personal tax returns. Businesses with multiple owners or members can avoid the double taxation of corporations on their income.

LLCs also offer flexibility in terms of management. Unlike corporations, which are required to have a board of directors and officers, LLCs can be managed by their members or by a designated manager. This allows for more control over the day-to-day operations of the business.

Tax Implications for LLC Owners

By default, LLCs aren’t taxed as a separate entity from their owners. Instead, the income and losses of the LLC are passed through to the individual owners who report it on their personal tax returns. This is known as “pass-through” taxation.

Pass-through taxation can be an advantage for LLC owners because it allows them to avoid double taxation on their income. In a corporation, the business is taxed on its income, and then the owners are taxed on the dividends they receive from the business. With an LLC, the business’s income is only taxed once, at the individual level.

An LLC with only one member (known as a “single member LLC” or “SMLLC”) is automatically treated as a disregarded entity, not separate from its owner, unless it files Form 8832 and elects to be treated as a corporation, or files Form 2553 to be taxed as an S corporation. 

A domestic LLC with at least two members is automatically classified as a partnership for federal income tax purposes; however, it may elect to be treated for tax purposes as a corporation (S corp or C corp) by filing the proper IRS forms.

An LLC may be a great option for small business owners who are looking for liability protection and flexibility in terms of taxation and management. If you’re considering starting a business, it is important to consult with a qualified attorney and/or accountant to determine whether an LLC is the right choice for your specific business needs.

Determining Your Compensation Method

If you form an LLC, you’ll need to choose how you’ll pay yourself. 

Easiest method: pass-through taxation

The easiest way to pay yourself is to report the income and expenses of your LLC with your personal tax return. By default, a single member LLC is taxed the same way as a sole proprietorship. 

“The IRS disregards Single Member LLCs as if they do not exist,” explains H. Nicole Rosen, an Enrolled Agent with BoundlessAdvisors.com.  “A single member LLC pays themselves by simply transferring money from the LLC bank account to their own (personal) bank account.  A single member LLC is taxed on the overall profit of the business as of December 31st (assuming cash basis and calendar year).” 

With a single member LLC that has not elected to be taxed otherwise, income and expenses of the business are reported on Schedule C, which is filed with the taxpayer’s personal income tax return. (LLCs with multiple members will get a Schedule K-1 from the LLC.)

That’s how Brandon Lovingier, ChFC®, MQFP, founder of Your Virtual Planner, an outsourced virtual paraplanning and content creation services for fee-only financial planners, has decided to approach it. 

Operating as a single member LLC, “I take a percentage each month as personal compensation and send that to our personal account,” he explains. 

One reason he takes this approach is for simplicity. 

“I don’t want to add a lot of administrative burden to my life if it won’t yield any real usable income for my family,” he says. “Also, I’ve heard S-Corps get audited more often than other entity structures. I’d prefer to avoid having to deal with the time and expense involved in sending over documents, responding to inquiries, etc.”

One of the disadvantages of paying yourself this way is that you’ll pay self-employment taxes on income received from the LLC, up to the maximum annual limit. (For 2023, the first $160,200 of combined wages, tips, and net earnings is subject to any combination of the Social Security part of self-employment tax). 

Salary vs. draw: more complicated

Another approach is for the owner of the LLC to elect to be taxed as an S corporation or C corporation by filing the appropriate form with the IRS. 

Let’s start with the S corporation, since it’s a popular choice. 

One of the main reasons LLC owners elect to be taxed as an S corporation is to save money on payroll taxes, without risking double taxation that can occur when taxed as a C corporation. 

Here’s how it works. 

A member of the LLC who works in a business that has elected to be taxed as an S corporation earns a salary on which they will pay payroll taxes (including FICA taxes). They may then take additional compensation in the form of distributions. They will pay income tax on both types of compensation, but distributions won’t be subject to payroll taxes. This may allow the business owner to save money on payroll taxes. 

Jim Wang is a personal finance blogger and creator who shares his approach to investing, budgeting, and managing money on his website WalletHacks.com.  He runs payroll to pay himself a “regular salary and then periodically I take an owner’s draw,” he explains. 

It is crucial to pay a “fair and reasonable” salary, Wang advises. “If you don’t pay yourself enough, it could be a big issue because FICA is calculated based on your salary.”

Riley Adams, CPA, Founder and CEO of Young and the Invested, a financial publisher focused on helping people educate themselves about all things money, takes a similar approach. “I’m a business owner with an LLC that’s classified as an S Corp for federal tax purposes,” he explains. He also a retired CPA.

“I pay myself a regular salary in line with the most directly comparable compensation for my roles and responsibilities with the website. Generally, I consider myself to be a staff writer, though as the owner I clearly have more responsibilities than that.” He acknowledges that figuring out appropriate compensation can be difficult. 

“I also pay myself an owner’s draw that consists of all undistributed profits as that money can’t remain inside the LLC / S Corp and must be distributed each year for tax purposes. C Corps are the only legal entity able to retain profits and not distribute each year.”

These two examples illustrate that while paying yourself as an S corporation can save money, it can also be more complicated. 

“The owner of a single member LLC who elects to be treated as an S-corp is required to pay themselves a reasonable compensation based on the line of work the business does,” Rosen says. “This is absolutely not optional and it is the number one mistake I see single member LLCs who elect S-corp status make.  It is, also, the only way that an S-corp election becomes a tax saving strategy.”

While it may be tempting to pay yourself a very minimal salary or no salary, that could come back to haunt you if the IRS determines that you did not pay yourself a reasonable salary. 

Plus you can shortchange yourself in other ways. 

Not only will your Social Security eligible earnings be lower, you may also limit your tax-advantaged retirement savings. “The amount you can contribute to a retirement plan is often based on your salary so you want to pay yourself enough to take advantage of those to the extent that you want to,” Wang advises. “For example, we contribute to a Solo 401K and the employer contribution is limited to 25% of compensation.”

A reasonable salary paid through payroll can also make it easier to qualify for personal loans, credit cards, or a mortgage. 

Still another option is to elect to have your LLC taxed as a corporation. LLC owners who elect to be taxed as a C corp must also pay themselves a reasonable salary. In addition they may be able to pay themselves distributions. “But distributions must be made according to share ownership,” warns Sutton. And since taxes are paid at both the corporate and individual level, double taxation can be a problem. 

Setting Up Your LLC for Payroll

Setting up payroll for your limited liability company is an important step in managing your business’s finances. Payroll involves paying you and any employees on a regular basis and withholding the appropriate taxes from their paychecks. 

Here are some steps to help you set up formal payroll for your LLC.

Form an LLC 

When you form an LLC, you’ll choose a business name, create an LLC operating agreement, get a registered agent, and file with your state (usually the Secretary of State or Department of Commerce). You can set up an LLC yourself or use a business formation service.

For more on how to form an LLC, see Nav’s guide to starting an LLC here. 

Obtain an EIN

When you form your LLC, you may need to request an Employer Identification Number (EIN), which is a unique number used to identify your business for tax purposes. The EIN may be necessary for filing tax returns and paying taxes.

You do not need to request an EIN if your business is a new LLC with one owner (single member LLC) and: 

• It does not choose to be taxed as a corporation or S corporation, and 
• It has no employees or excise tax liability.

But you can still request a free EIN from the IRS, and it may prove to be helpful as you establish business credit or apply for small business loans. 

You do need to request an EIN from the IRS if you form a new LLC and 

• You have more than one owner (Multi-member LLC).
• You have one owner (Single Member LLC) and your LLC elects to be taxed as a corporation or an S corporation.

The IRS website provides a user-friendly platform that guides you through the process of obtaining an EIN. 

You’ll need to provide basic information about your LLC, such as its name, address, and the names of its owners. Once you have submitted your application, you’ll receive your EIN instantly or within a few business days.

Alternatively, you can obtain an EIN by mail, fax, or phone. The process is similar to the online application, but it may take longer to receive your EIN.

Set up a business bank account

Setting up a business bank account for your LLC is important for separating your personal and business finances. This makes it easier to keep track of your business’s income and expenses, and can also help prevent legal issues down the line. A separate business bank account also helps to establish your LLC as a legitimate business entity.

When setting up a business bank account, you’ll need to provide documentation that proves your LLC’s existence, such as its EIN and articles of organization. You may also need to provide identification for the LLC’s owners or members.

“Don’t co-mingle funds,” Rosen warns. “Don’t pay personal expenses out of the business bank account and think of that as paying yourself.  “Transfer the money from the LLC account to the personal bank account, and then pay your personal bills.”

Set up an accounting system

The success of this approach requires your business to keep accurate financial records. You need to make sure your business bookkeeping is up to date, with an accurate record of your business income and business expenses. (Business profits, after all, are the difference between the two.) 

Elect taxation method

If you don’t want your LLC to be taxed as the default method (pass-through entity for SMLLC or partnership for MMLLC) you’ll need to file election forms with the IRS to be taxed as a C corporation or S corp. There are deadlines for making this choice so be sure to talk with your tax advisor or review IRS information on business taxes. 

As a business owner, it’s important to compensate yourself for the hard work you put into your company. As mentioned, one option is to pay yourself a salary, which can provide stability and predictability in your personal finances. However, before you can start paying yourself a salary, you need to determine if it’s the best option for your LLC. 

Consult with a tax professional (CPA, EA or accountant) to help you make this decision.

“Work with your accountant to figure out the best cadence based on your tax situation because you have a lot of different options,” Wang suggests. “They know tax law the best so I always lean on mine to be sure.”

Setting Up Payroll for Your LLC

If you elect to be taxed as an S Corp or C corp, you’ll need to set up formal payroll. This involves calculating the amount of your salary, paying yourself on a regular basis, withholding taxes, and remitting taxes to state authorities.

When setting up payroll, you’ll need to decide on a payroll schedule — whether you’ll pay yourself weekly, bi-weekly, or monthly. This decision will depend on your personal financial needs, the financial health of your business, IRS requirements, and even state law. 

“Don’t try to DIY the payroll when you elect S-corp status,” Rosen advises. “It is easy to get yourself in trouble and the IRS can charge civil penalties for failure to pay payroll tax up to 100% of the original amount of tax due.” 

Talk to your tax advisor. And consider using a payroll software or service to make this task much easier. 

Withholding taxes and filing requirements

When you pay yourself a salary, you must withhold and pay payroll taxes to the appropriate authorities. This involves calculating and withholding Social Security and Medicare taxes, federal income taxes, and state and local taxes. Additionally, you will need to file payroll tax returns and provide W-2 forms to yourself and any other employees.

You may also need to get worker’s compensation insurance, and pay unemployment taxes to the state. 

It’s important to keep accurate records of salary payments and tax withholdings.

It’s also important to keep up-to-date with tax laws and regulations, as they can change. Talk with your tax professional and consider using payroll software that automates much of the tax filing process to help you and your business comply with payroll taxes and filing requirements.

Payroll tax deadlines and penalties

If you miss a payroll tax deadline, you may face penalties and interest charges. These penalties can add up quickly and impact your business’s financial health. It’s important to prioritize payroll tax payments.

In addition to payroll tax deadlines, you may need to pay estimated quarterly taxes. As the IRS explains:

“Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.”

If your LLC has elected to be taxed as a corporation and you may be able to adjust your withholding so you don’t have to also make estimated tax payments. Again, talk with your tax pro or use the IRS Tax Withholding Estimator. 

Even though he is a retired CPA, Adams uses a payroll service and encourages business owners to do the same. “I strongly recommend using a payroll provider to handle all of the administrative aspects of paying yourself a salary as an LLC owner,” he says. “They’ll keep things organized and in compliance with any necessary filing requirements. You can DIY this, but for the added stress and time commitment, I find it’s far more worth it to outsource this component.”

Factors to consider when deciding your pay

When deciding on your pay, it’s important to consider a variety of factors. First, of course, you must meet any IRS requirements regarding compensation and payroll taxes. 

Additionally, you’ll want to consider the financial needs of your business. You want to ensure that your business has enough cash flow to cover expenses–including salaries or other types of compensation–with enough left over to invest in growth opportunities.

You also need to consider your own personal financial needs, like how much income you need to support yourself and your family. Also consider whether you’re willing to take a variable income or if you want to structure your business to get the guaranteed payments offered by a salary.

A salary provides a stable income and can help with budgeting and planning. But your business needs to be making steady income to ensure it can pay that salary.

Another important factor to consider is the tax benefits and tax implications of different compensation methods, as discussed earlier. 

When it comes to taxes, there are pros and cons to paying yourself as a disregarded entity through your LLC’s profits, versus electing to be taxed as a corporation and getting compensation from a salary and distributions. Salary payments are subject to payroll taxes, which include Social Security and Medicare taxes. However, these taxes also count towards your Social Security and Medicare benefits in the future.

Distributions make through an LLC taxed as a corporation, on the other hand, are not subject to payroll taxes. This can save you money in the short-term, but it also means that you won’t be contributing as much towards your Social Security and Medicare benefits.

It’s important to work with a tax professional to determine the best compensation method for your business and personal tax situation.

The Bottom Line

Regardless of which method you choose to pay yourself as a business owner, consider paying yourself a regular amount each month (following IRS guidelines, of course). That will provide you with a stable income and can help with both business and personal budgeting and planning. 

Lovingier says paying himself a regular “salary” has been a game changer. “Having a system to regularly send money ‘to the house’ each month has been very helpful,” he observes. “It’s also been very helpful for my wife to see that my business is viable.” 

He didn’t always operate that way, though. “Before, I’d only take money out as needed and so the ‘seen’ profits were sporadic and irregular. Now, I have a set percentage I pull from the business each and every month. This is also a great way to help me be more disciplined about avoiding overspending in the business.”

Paying Yourself Through Your Own LLC FAQ’s

How are corporate LLCs taxed?

An LLC can elect to be treated as an association taxable as a corporation by filing Form 8832, Entity Classification Election with the IRS. A corporation typically makes estimated tax payments as it earns or receives income during its tax year. After the end of the year, the corporation files a federal income tax return. A state tax return and/or local tax return may be required as well. 

If the LLC is a corporation it will file a Form 1120, U.S. Corporation Income Tax Return. The 1120 is the C corporation income tax return, and there are no flow-through items to a 1040 or 1040-SR from a C corporation return.

One of the disadvantages of being taxed as a corporation is that it may result in double taxation. Dividends may be taxed at both the corporate level and at the individual level. 

It will also likely cost more to hire a tax professional to prepare this type of tax return. 

What is the best way to draw a salary from an LLC for tax purposes?

If you operate as a single-member LLC and have not elected to be taxed as an S corp or C corp, you can simply pay yourself without withholding payroll taxes such as FICA. It’s important to transfer money you pay yourself from a business bank account to a personal bank account. Do not pay personal personal expenses from your business account, or you may jeopardize the legal protection of the LLC. 

If you elect for your LLC to be taxed as a corporation, you’ll need to pay yourself a salary, and withhold and pay payroll taxes. It is highly recommended that you hire an accounting professional or payroll service provider to make sure you do this correctly. Penalties can be severe. 

Can an LLC owner be a W-2 employee?

Yes, the owner of an LLC that elects to be taxed as an S corp or C corp and pays themselves a reasonable salary for activities they perform for the business will be subject to payroll taxes. The LLC will provide a W-2 to the IRS, state taxing authorities, and the employee.