Do You Really Have to Pay Yourself With an LLC? – Avoid This Mistake + FAQs

Confused about how to pay yourself with an LLC? You’re not alone. According to recent data, over 40% of small business owners struggle with LLC payment structures, leading to tax penalties and compliance risks.

In most cases, LLC owners do not have to pay themselves a formal wage. Single-member and multi-member LLCs let owners take draws from profits instead of a salary. But if your LLC is taxed as an S-Corp or C-Corp (a traditional corporation), you must pay yourself a reasonable salary through payroll.

Single-Member LLC (Disregarded Entity): Owner’s Draw (No Salary Needed)

A single-member LLC has one owner. By default, the IRS treats it as a disregarded entity for taxes (like a sole proprietorship). This means the business’s income is pass-through to your personal tax return. There’s no separate business income tax return for the LLC itself.

As the sole owner, you don’t take a paycheck or W-2 salary from a single-member LLC. Instead, you pay yourself through an owner’s draw. This is as simple as transferring money from the LLC’s bank account to your personal account. There’s no formal payroll process needed because, for tax purposes, you are the business.

Even though you’re not on a payroll, you still owe taxes on the LLC’s profits. All the profit is considered your personal income. You’ll pay income tax and self-employment tax on the LLC’s net earnings. (Self-employment tax covers Social Security and Medicare, similar to payroll taxes.) It doesn’t matter how much you actually withdraw as draws – even if you leave some profits in the business, you pay tax on all profits. It’s wise to set aside money for taxes since no taxes are withheld from an owner’s draw.

Tip: Keep your LLC’s money separate from your personal funds. Use a dedicated business bank account and take draws from it. This preserves your liability protection and creates a clear paper trail for compliance.

Multi-Member LLC: Distributions for Each Partner (No W-2s for Owners)

A multi-member LLC has two or more owners (“members”). By default, the IRS treats it like a partnership for tax purposes. The LLC itself typically files an informational partnership tax return, but the profits pass through to the owners’ personal tax returns.

In a multi-member LLC, owners generally pay themselves with distributions of profit (also called draws). Each member can withdraw money from the business, usually in proportion to their ownership share or as agreed in the operating agreement. For example, if two partners own the LLC 50/50, each is entitled to about 50% of the profits (and can draw that amount out).

Members of an LLC (treated as a partnership) do not go on the company payroll as employees. You should not issue yourself a W-2 in a standard multi-member LLC. Instead, each owner takes an owner’s draw. The LLC’s profit is split among the owners, and each pays income tax (and typically self-employment tax) on their share of the profit. This is true regardless of how much cash they actually withdraw – you could leave earnings in the business for growth, but you’ll still be taxed on your share.

Some multi-member LLCs use guaranteed payments to compensate members who are actively working in the business. A guaranteed payment is a fixed amount paid to a member regardless of profit (similar to a salary, but for a partner). These payments are tax-deductible to the LLC and count as immediate income to the recipient member. They’re also subject to self-employment tax for that member. Owners might set up guaranteed payments to ensure each gets a minimum compensation before splitting remaining profits.

As with any LLC, co-owners should maintain clear records of distributions. Use a business bank account and document each draw by each member. This avoids disputes and helps with accounting and taxes. Each member will receive a Schedule K-1 (from the partnership tax return) showing their share of LLC profit to report on their personal return.

S-Corp Election for LLC: When a Salary Is Mandatory

An LLC can choose to be taxed as an S-Corporation (by filing a form with the IRS). This election is popular when an LLC’s profits grow, because it can potentially save on taxes. However, with an S-Corp election, the way you pay yourself changes significantly: you must put yourself (and any other owner who works in the business) on a payroll as an employee.

In an S-Corp (even if it’s still legally an LLC), owner compensation works like this: you pay yourself a salary through the company’s payroll, and you can also take additional profit distributions. The IRS requires “reasonable compensation” for owner-employees of an S-Corp. In plain terms, that means you must pay yourself a fair salary for the work you do – similar to what you would have to pay someone else to do your job. You’ll receive a W-2 for this salary, and the LLC must withhold income tax and payroll taxes (Social Security and Medicare) just like any employer.

Why go through this trouble? Because after paying yourself a reasonable salary, any remaining profits can be taken as distributions (sometimes called dividends). Those distributions are not subject to self-employment tax or payroll taxes. You still pay regular income tax on distributions, but you avoid the 15.3% self-employment tax that would normally apply to all profits in a regular LLC. This can mean tax savings for the owner. For example, if your LLC made $100,000 in profit and you pay yourself a $60,000 salary, you’ll pay payroll taxes on that $60k. The remaining $40,000 can be taken as a distribution, on which you don’t pay Social Security/Medicare taxes – only income tax.

However, choosing S-Corp status comes with responsibilities. Mistake to avoid: Don’t try to skip paying yourself a salary to dodge taxes. The IRS watches S-Corps for owners who take all profits as distributions. If you fail to pay a reasonable salary, you can face back taxes and penalties. Always run payroll for yourself at a fair market rate. Running payroll means more paperwork (you may need to use a payroll service or software) and the LLC will have to file quarterly payroll tax forms and W-2s annually.

In summary, with an S-Corp elected LLC, you have to pay yourself (and other working owners) a salary. It’s mandatory and a key part of compliance. But it also allows you to split your income into salary and distributions, potentially lowering the total employment taxes you pay.

LLC Taxed as a C-Corporation: Salary and Double Taxation

An LLC can also elect to be taxed as a C-Corporation (regular corporation), though this is less common for small businesses. In this setup, the LLC is treated as a separate tax-paying entity. The company pays corporate income tax on its profits, and if you as the owner want to take money out beyond a salary, you would take it as dividends (which are not tax-deductible to the company).

If your LLC is taxed as a C-Corp, paying yourself usually means drawing a salary as an employee of the company. Just like with an S-Corp, you’d be on payroll, and the company withholds taxes and pays employer payroll taxes. A C-Corp can also pay dividends to you as a shareholder from its after-tax profits, but those dividends would be taxed again on your personal return (this is the classic “double taxation” of C-Corps).

Typically, small business owners avoid the C-Corp route unless there’s a specific reason (for example, seeking investors or certain fringe benefits). It often doesn’t make financial sense to choose double taxation if you can qualify for pass-through treatment. But if you do have an LLC taxed as a C-Corp, just remember: you have to pay yourself through payroll to get money out (or take dividends with that extra tax cost). All the formalities of a corporation’s payroll and tax filings apply.

5 Costly Mistakes LLC Owners Make When Paying Themselves

Even with the basics down, it’s easy to slip up. Avoid these common mistakes when deciding how to pay yourself from your LLC:

• Mixing personal and business funds: Don’t pay personal expenses directly from the LLC account. Always transfer money to yourself (owner’s draw or salary) and then use it for personal needs. Mixing funds (commingling) can mess up bookkeeping and even jeopardize your LLC’s liability protection.

• Treating yourself as an employee in a default LLC: If your LLC is not taxed as a corporation, you should not put yourself on payroll or issue a W-2 to yourself. Paying yourself a W-2 salary in a single-member or partnership LLC (without an S-Corp election) is incorrect and can complicate your taxes. Use owner’s draws instead.

• Not paying a salary when required (S-Corp situation): Once you elect S-Corp status for your LLC, you must pay any active owner a reasonable salary. Skipping this or paying yourself an unreasonably low salary to maximize untaxed distributions is a big mistake. The IRS can reclassify your distributions as wages and hit you with back payroll taxes and penalties.

• Forgetting to set aside taxes on draws: If you take owner’s draws (in a single or multi-member LLC), remember that no taxes are withheld. A common mistake is to spend all the withdrawn money and not save for the tax bill. Make estimated tax payments quarterly on your LLC income to avoid IRS underpayment penalties.

• Counting owner’s pay as a business expense: Don’t try to write off your owner’s draws as an expense on the LLC’s books. Owner’s draws are not a deductible business expense – they are a distribution of profit. If you’re an S-Corp and on payroll, your salary is a business expense. But if you’re taking draws in a regular LLC, those draws should not reduce the company’s reported profit. Misclassifying personal draws as expenses will understate your income and can lead to big trouble with the IRS.

LLC Owner Pay Glossary: Key Terms You Should Know

Owner’s Draw: A withdrawal of funds by an LLC owner for personal use. In default-taxed LLCs, owners take draws instead of a paycheck. The draw itself isn’t taxed at the time of withdrawal; however, the owner pays taxes on the LLC’s profits (from which draws come).

Pass-Through Taxation: A tax structure where the business doesn’t pay income tax as an entity. Instead, profits “pass through” to owners and are taxed on their personal tax returns. LLCs (except those taxed as C-Corps) are pass-through entities, similar to sole proprietorships and partnerships.

Disregarded Entity: An IRS term for a business entity that is ignored as separate from its owner for tax purposes. A single-member LLC is a disregarded entity by default. The IRS treats the LLC’s income as the owner’s income directly. (The LLC is separate legally, but not separate for federal income tax filing.)

Self-Employment Tax: The tax self-employed individuals pay for Social Security and Medicare. It’s roughly 15.3% of net self-employment income. In a default LLC (single or multi-member), owners pay self-employment tax on their share of the profits, since they are not receiving a W-2 salary with those taxes withheld.

Payroll Taxes: Taxes withheld or paid on employee wages, primarily Social Security and Medicare taxes (FICA). In an LLC that has employees (or an owner working as an employee in an S-Corp setup), the company must handle payroll taxes. If you’re a sole owner taking draws, you aren’t paying payroll taxes through withholding – instead, you pay self-employment tax on your income.

Guaranteed Payments: In a multi-member LLC taxed as a partnership, these are payments to a member that are made regardless of the business’s profit (similar to a salary for that member). Guaranteed payments are taxable to the recipient and are generally subject to self-employment tax. They also reduce the total profits that get split among the partners.

Reasonable Compensation: A concept for S-Corps (and corporations) requiring that any owner who works in the business be paid a fair market wage for their role. The IRS expects your salary to be “reasonable” based on your duties, experience, and industry standards, rather than taking all profits as distributions. Paying yourself too low could flag an audit.

Real-World Examples: Paying Yourself in Different LLC Scenarios

Let’s look at a few simplified scenarios of how LLC owners might pay themselves and what the tax outcomes are:

Scenario (LLC Type)	Owner’s Pay Method	Example Owner Withdrawal	Tax Outcome
Single-Member LLC (default tax)	Owner’s draw from profits	Owner withdraws $5k/month from business (total $60k/year) out of $100k profit	Owner pays income tax and self-employment tax on $100k profit (all LLC profit), regardless of how much was drawn.
Multi-Member LLC (default tax)	Owners’ draws (per share of profit) or guaranteed payments	Two 50% owners; each takes $30k draw from a $100k profit LLC (each owner’s share is $50k)	Each owner pays income tax and self-employment tax on $50k (their share of profit). The draws themselves aren’t taxed separately at withdrawal.
LLC with S-Corp Election	Salary + profit distribution	Owner pays herself a $50k salary and also takes a $50k distribution (LLC had $100k profit before salary)	Salary is subject to payroll taxes (Social Security/Medicare) and income tax. The $50k distribution is only subject to income tax (no self-employment tax on that portion).

In all scenarios, the owners should also make sure to pay estimated taxes or withhold adequate taxes throughout the year to cover their tax liability on the income.

LLC vs. Sole Proprietorship vs. Corporation – How Does Owner Pay Differ?

It’s helpful to compare how owner compensation works in different business structures:

• Sole Proprietorship: If you never formed an LLC and operate as yourself, you simply take money out of the business as needed. This is essentially the same as a single-member LLC’s draw method. All business profits are your personal income. You pay income tax and self-employment tax on the profit. There’s no separate business entity, so no corporate payroll for the owner.

• Partnership (General Partnership): Similar to a multi-member LLC without the LLC. Partners take withdrawals from profits. Each partner is taxed on their share of earnings on their personal return, owing self-employment tax on it. Partners aren’t employees of the partnership, so no W-2 salaries for the owners (just like a multi-member LLC by default).

• S-Corporation: In an S-Corp (whether it’s an LLC electing S-Corp status or a corporation that filed as S-Corp), owners who work in the business are treated as employees. They must be paid salaries with payroll taxes taken out. They can also receive additional profit distributions which are not subject to Social Security/Medicare taxes. The key difference from an LLC default is the required payroll and the split of salary vs. distribution for owner income.

• C-Corporation: In a traditional corporation (or an LLC taxed as a C-Corp), the company is a separate taxpayer. Owners typically draw a salary as employees of the corporation. Any profits left in the company are taxed at the corporate level. If distributed as dividends to owners, those dividends are taxed again on the individual level. Unlike an LLC, a C-Corp does not offer pass-through taxation by default – hence the “double taxation” on profits and dividends. Paying yourself from a C-Corp usually means setting an appropriate salary through payroll, and possibly taking dividends for additional profit (knowing those come with an extra tax layer).

FAQ

Q: Single-member LLC – do I have to pay myself a wage?
A: No. In a single-member LLC (default tax status), you take owner’s draws from the profit. You don’t need to put yourself on a payroll unless you elect S-Corp taxation.

Q: How do I pay myself from my LLC properly?
A: Simply transfer money from your LLC’s business account to your personal account as an owner’s draw (write a check or electronic transfer). Record it in your books for tracking.

Q: Can I be an employee of my own LLC?
A: Only if your LLC is taxed as an S-Corp or C-Corp. By default, LLC owners are not employees of the company – they are owners taking distributions. (No W-2 for default LLC owners.)

Q: Are owner’s draws taxed?
A: The draw itself isn’t taxed at the moment you take it. However, the business profit that your draw comes from is taxed to you. In other words, you pay income tax (and self-employment tax, if applicable) on your share of LLC profit, whether you withdraw that money or leave it in the business.

Q: What if I don’t pay myself anything from my LLC?
A: That’s okay – you’re not required to take money out. You can leave profits in the LLC’s bank account to reinvest or save. Just remember, you’ll still owe taxes on the LLC’s profit even if you don’t withdraw it.

Q: How much should I pay myself as an LLC owner?
A: It depends on your business’s finances and personal needs. There’s no fixed rule. Pay yourself an amount that makes sense: enough to meet your needs but also sustainable for the business (don’t drain your company’s cash flow).

Q: Do I need a separate bank account for my LLC to pay myself?
A: Yes, you should use a separate business bank account. Pay yourself by transferring from the LLC account to your personal account. Keeping finances separate is important to maintain liability protection and clear records.