Does an LLC Owner Really Get Paid? – Don’t Make This Mistake + FAQs

Lana Dolyna, EA, CTC

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Confused about how LLC owners get paid? You’re not alone.

According to a 2022 survey, 26% of small business owners admit that not paying themselves a salary is their worst financial habit.

💡 Quick Answer: How LLC Owners Get Paid (Federal Rules First)

Yes, an LLC owner can get paid – but not always in the traditional “salary” sense. How you pay yourself from an LLC depends on your LLC’s tax classification under IRS rules. Remember, an LLC is a legal business structure created under state law, but for federal tax purposes, the IRS doesn’t have a unique “LLC” tax category.

Instead, your LLC is taxed by default as either a sole proprietorship (if one owner) or a partnership (if multiple owners), unless you elect to have it taxed as an S-corporation or C-corporation. Each tax status has different rules for owner compensation.

Here’s the quick breakdown:

Single-Member LLC (default sole proprietor) – You do not get a W-2 paycheck from the company. Instead, you take owner’s draws (also called distributions) from the profits whenever you need. The LLC’s profit is passed through to your personal tax return, and you pay income tax (and self-employment tax) on that profit. Why no salary? Because under IRS rules, you are not considered an employee of your own single-member LLC.
Multi-Member LLC (default partnership) – The owners (called members) also don’t go on payroll. Like a partnership, each member can take periodic distributions of profit. Additionally, the LLC can arrange guaranteed payments to compensate a member for work (similar to a salary substitute). But again, members are not treated as employees at the federal level, so no W-2 salaries in the default partnership tax mode. Profits pass through to owners, who pay income tax and self-employment tax on their share.
LLC with S-Corp Election – You’ve chosen to have your LLC taxed as an S corporation (a special type of pass-through entity). In this case, any owner who works in the business must be put on payroll as an employee and paid a “reasonable salary” via W-2, just like any employee. You can still take additional profit out as dividends (distributions) on top of your salary. The key benefit: only the salary portion is subject to Social Security/Medicare taxes (payroll taxes), while the remaining profit distributions are not – potentially saving on self-employment tax. (The IRS keeps an eye on this; they require that the salary be reasonable for the work you do.)
LLC with C-Corp Election – If your LLC is taxed as a regular C corporation, the company is a separate tax-paying entity. As an owner, if you also work in the business, you would typically be an employee drawing a salary (with withholding, payroll taxes, etc.). The corporation can also pay you dividends as a shareholder from its after-tax profits. Unlike an S-corp, a C-corp pays corporate income tax on profits; your salary is deductible to the company, but dividends are not (so dividends get taxed twice – once at the corporate level and again on your personal return).

In short, at the federal level, LLC owners can get paid, but how they get paid varies:

Default LLCs (sole proprietorship/partnership) – Paid by draws/distributions, no paycheck, but all profits taxed on owner’s return (with self-employment tax for active owners).
S-corp elected LLC – Paid by a mix of salary and distributions; must run payroll for the salary portion.
C-corp elected LLC – Paid by salary and/or dividends; essentially treated like any corporation paying its owner-employees.

Below is a quick-reference table summarizing how owner payment works under each tax setup:

LLC Tax Status	Is Owner an Employee?	How the Owner Gets Paid	Taxes on Owner’s Income
Single-Member LLC (default sole prop)	No (owner ≠ employee)	Owner’s draws from profits (no W-2)	Owner pays income tax + self-employment tax on all LLC profit (15.3% SE tax). Draws themselves aren’t taxed separately.
Multi-Member LLC (default partnership)	No (members ≠ employees)	Distributions of profit to members; optional guaranteed payments for services	Owners pay income tax on profits; active members pay self-employment tax on their share and guaranteed payments. No W-2 salaries.
LLC with S-Corp Election	Yes (if working in biz)	Salary (W-2) + distributions (profit)	Salary portion: subject to income tax and payroll taxes (Social Security & Medicare). Distribution portion: income tax only (no payroll tax). Must pay reasonable salary.
LLC with C-Corp Election	Yes (if working in biz)	Salary (W-2) + optional dividends	Salary: subject to income tax + payroll taxes. Dividends: taxed twice (corp pays tax on profits; owner pays tax on dividends). No self-employment tax, since owner’s income is via wages/dividends.

State Nuances: Business laws and tax rules are mostly federal in this area, but states have some twists. For example, state taxes or fees may apply to LLCs regardless of how you pay yourself (e.g. California’s annual LLC fee and franchise tax). A few states don’t recognize S-corp status for state tax purposes (meaning they might tax your LLC’s income like a regular LLC even if you’re an S-corp federally). However, these state-specific nuances usually don’t change how you take money out as an owner – they mostly affect how much extra tax or paperwork the state wants. Always check your state’s LLC tax regulations, but rest assured that the mechanics of paying yourself (draw vs salary etc.) are driven by the IRS classification first.

Now that we’ve covered the high-level answer, let’s explore what not to do, key terms you should know, and detailed examples of each scenario.

❌ Things to Avoid When Paying Yourself from an LLC

Even with the flexibility LLCs offer, there are common pitfalls that business owners should avoid when it comes to compensating themselves. Steer clear of these mistakes:

Mixing Personal and Business Funds: Don’t treat your LLC’s bank account like your personal wallet. Avoid randomly dipping into business funds for personal expenses. This not only complicates accounting but could jeopardize your liability protection. Keep a clear record of any owner draws you take, and use them for personal expenses after transferring to your personal account.
Not Paying Yourself at All: As noted earlier, a significant number of owners never pay themselves, considering it noble to sacrifice income. While reinvesting in the business is important, never paying yourself can lead to personal burnout and messy finances. Moreover, it confuses the true profitability of your business. You don’t need a formal salary in a default LLC, but do take a reasonable draw when the business can afford it – you are entitled to enjoy the fruits of your labor 🍎.
Treating Draws as Expenses: An owner’s draw is not a business expense. It’s a distribution of profit, not a deductible salary. Some new LLC owners mistakenly try to write off the money they pay themselves as a business expense – this is incorrect and could get you in trouble with the IRS. Remember: if you’re not on payroll (W-2), then any money you take out is after-profit distribution, not a business expense on the income statement.
Ignoring Self-Employment Tax: LLC owners in default taxation often forget about the self-employment tax hit. If you’re a sole proprietor or partner in an LLC, plan ahead for that roughly 15.3% tax on your net earnings (this covers Social Security and Medicare). It’s essentially the equivalent of payroll taxes that would be split with an employer if you were on a salary. Failing to set aside money for this can lead to a nasty surprise at tax time. Tip: consider paying quarterly estimated taxes to cover your income and self-employment tax obligations.
Unreasonable S-Corp Salary (or None at All): If your LLC is an S-corp for taxes, a big no-no is trying to take all your profit as distributions and paying yourself little to $0 salary to avoid employment taxes. The IRS has taken action against owners who do this by reclassifying those distributions as wages (leading to back taxes and penalties). On the flip side, paying yourself way above market rate can also be counterproductive. Stick to a reasonable salary for your role – what you’d pay someone else to do the job – and then you can take extra profits as distributions.
Forgetting State Obligations: Don’t forget that some states require additional filings or payments if you have employees (even if you’re your own employee). For instance, if you put yourself on payroll, you may need to register for state unemployment insurance, state payroll taxes, or workers’ comp exemptions as an owner-employee. Also, states like California charge an $800 annual franchise tax for LLCs regardless of income. Such costs should be factored in when deciding how to pay yourself (e.g., an S-corp might save federal taxes but could trigger extra state fees).

Avoiding these pitfalls will keep your compensation strategy compliant and financially smart. Next, let’s clarify some terminology that’s crucial to understanding LLC owner pay.

🗝️ Key Terms Every LLC Owner Should Know

Getting a handle on how LLC owners get paid means understanding the lingo. Here are some key terms and concepts:

Owner’s Draw: This is the most common way LLC owners pay themselves (for sole proprietorships and partnerships). An owner’s draw is simply pulling money out of the business for personal use – typically from the profits or accumulated equity. It’s not a salary (no taxes are withheld at the time of the draw). Instead, you pay income tax on all your business’s profit whether you withdraw it or not. Example: You made $50,000 in profit this year and transferred $30,000 to your personal account as a draw. You’ll still pay tax on the full $50k, but the draw itself isn’t separately taxed.
Distributions: Often used interchangeably with draws, distributions usually refer to profit payouts to LLC owners, especially in multi-member LLCs or S-corps. In an S-corp context, “distributions” are the profit paid to shareholders (owners) beyond their salary. In a partnership LLC, distributions refer to each member’s share of the profits. Distributions are usually proportional to ownership (unless the operating agreement says otherwise). They are not subject to payroll taxes.
Salary (W-2 Wages): A salary is a fixed regular payment for work, typically yearly-based, paid via payroll with taxes withheld. LLCs cannot pay owners a salary unless they have elected to be taxed as a corporation (S or C). If you’re an owner-employee, you get a W-2 each year like any worker. Salaries are a business expense that reduce the company’s profit. They also trigger payroll taxes (Social Security, Medicare, unemployment, etc.).
Self-Employment Tax: This is the 15.3% tax (as of current rates) that covers Social Security and Medicare contributions for self-employed individuals. It’s equivalent to the combined employer+employee FICA taxes for wages. If your LLC income is taxed on your personal return (sole proprietor or partnership LLC), you’ll pay self-employment tax on the profit. S-corp owners avoid self-employment tax on the distribution portion of profits (but still effectively pay it on their salary via payroll withholding). C-corp owner-employees don’t pay “self-employment tax” per se; instead, Social Security/Medicare are paid through their payroll.
Pass-Through Taxation: A tax structure where the business itself doesn’t pay income tax as an entity. Instead, profits “pass through” to the owners’ personal tax returns. LLCs by default are pass-through entities (sole prop or partnership), and S-corps are also pass-through. This means no corporate tax at the entity level. In pass-throughs, owners are taxed on the business profits directly. C-corps, by contrast, are not pass-through (they pay corporate tax).
Disregarded Entity: A single-member LLC is a disregarded entity for tax purposes by default. This means the IRS “disregards” the LLC as separate from the owner when it comes to income tax. All the LLC’s income and expenses are reported on the owner’s personal tax return (Schedule C, E, or F depending on the nature of income). A disregarded LLC doesn’t file a separate federal return for income taxes. (It might still need to file other forms, like employment tax returns if it has employees, or a state return in some cases.)
Guaranteed Payments: In a multi-member LLC taxed as a partnership, guaranteed payments are payments to a partner for services or use of capital that are made regardless of the partnership’s profit. They’re somewhat analogous to a salary for partners, although still not treated as wages. Guaranteed payments are deductible to the LLC and are taxable to the receiving partner as ordinary income (and usually subject to self-employment tax) in the year received. They ensure a partner who does more work or has priority gets compensated even if overall profit is low.
Reasonable Compensation: This term comes into play for S-corporation owners. The IRS requires S-corp owner-employees to be paid a reasonable compensation for their work before taking additional profit distributions. “Reasonable” generally means what you’d pay someone else to do the job of the owner (based on role, industry, region, etc.). It’s not explicitly defined in the tax code with a number, but case law and IRS guidance say to consider factors like duties, experience, time devoted, and comparable salaries. Paying yourself too little could raise a red flag with the IRS (they might reclassify distributions as wages), and paying too much just for the sake of it is usually tax-inefficient.

Keep these terms in mind as we go through examples—they’ll pop up often. Speaking of which, let’s look at some real-world style examples of how LLC owners actually pay themselves in different scenarios.

💼 Detailed Examples: How Different LLC Owners Pay Themselves

To make this concrete, let’s walk through a few scenarios. We’ll illustrate how the owner’s pay works in practice for each type of LLC taxation: single-member (sole prop), multi-member (partnership), S-corp, and C-corp. We’ll use simple numbers for clarity.

Example 1: Alice’s Bakery LLC (Single-Member LLC, Sole Proprietorship Taxation)

Alice is the sole owner of Alice’s Bakery LLC, a one-woman business. She didn’t file any special tax elections, so by default the IRS treats her LLC as a sole proprietorship. How does Alice pay herself?

How Alice Gets Paid: She takes owner’s draws. For instance, if in the first year her bakery earned $80,000 in profit (after expenses), Alice might decide to transfer $50,000 from the business account to her personal account over the year to cover her living expenses. She might take $4,000 per month as a draw.

No Paycheck or W-2: Alice isn’t on payroll. She doesn’t get a W-2 or “salary” from her LLC. In fact, if she tried to put herself on payroll, it would be incorrect because the IRS doesn’t recognize her as an employee of her own disregarded entity.

Taxes: Here’s the important part – Alice pays tax on the full $80,000 profit, not just on the $50k she withdrew. The $80k will be reported on Schedule C of her personal 1040 tax return, and she’ll owe income tax on it plus self-employment tax (15.3% of $80k, roughly $12,240) to cover Social Security and Medicare. The $50k she drew is not taxed again when she takes it out, because it’s already part of that profit. If she leaves the remaining $30k in the business bank account, it’s still her profit and still taxable to her.

To visualize Alice’s situation:

Alice’s Bakery LLC Finances	Amount (Year 1)	Tax Treatment
Business Net Profit	$80,000	Taxable to Alice as personal income (Schedule C). Also subject to 15.3% self-employment tax on $80k.
Owner’s Draws Taken	$50,000	No separate tax when drawn (already part of profit). Draws are not expenses.
Remaining Profit in Business	$30,000 (retained)	Still taxed to Alice (she can draw it later).
Salary to Alice	$0	Not allowed – she’s not an employee of her sole proprietorship.

Alice should also ensure she sets aside enough cash from her draws to pay her taxes (since no one is withholding taxes for her). Many sole proprietors pay quarterly estimated taxes to avoid a big bill in April.

Example 2: Bob & Carol’s Design Studio LLC (Multi-Member LLC, Partnership Taxation)

Now consider Bob & Carol’s Design Studio LLC, which has two owners: Bob and Carol. They run a graphic design business together and agreed to split profits 50/50. They haven’t elected any corporate tax status, so the IRS treats their LLC as a partnership.

How Bob and Carol Get Paid: They can each take distributions of profit from the business. Say the studio made $120,000 profit this year after expenses. By their 50/50 agreement, each is entitled to $60,000 of that profit. Throughout the year, Bob and Carol both periodically transfer money to themselves from the business – e.g. Carol might take $5,000 a month (total $60k), Bob might do the same.

Additionally, let’s say Carol manages most of the daily operations. Bob and Carol agree the LLC will pay Carol a fixed guaranteed payment of $20,000 a year (on top of splitting the remaining profit) to compensate her extra work. This is documented in their operating agreement.

No W-2 Salaries: Neither Bob nor Carol is on payroll as an employee. Just like the partnership rules, partners (members) aren’t issued W-2s for their share of business income. The $20k guaranteed payment to Carol is not a “salary” in the traditional sense – it’s reported on the partnership tax return and on Carol’s K-1, but no payroll taxes were withheld from it upfront.

Taxes: The LLC files a Form 1065 partnership return showing $120,000 profit. Carol’s guaranteed $20k is deducted as an expense, leaving $100,000 of residual profit to split. So Bob gets $50k, Carol gets $50k, in addition to her $20k guaranteed.

Carol will receive a K-1 form allocating her $50k share of profit plus $20k guaranteed (total $70k taxable to her). Bob’s K-1 will show $50k. They’ll each report this on their personal returns.
Both will pay income tax on these amounts, and because they actively participate in the business, self-employment tax applies to both their shares (including Carol’s guaranteed payment).
The guaranteed payment is subject to self-employment tax for Carol and is taxed as ordinary income to her, just like her share of profit.

A summary for Bob & Carol’s year:

Bob & Carol’s LLC (Year 1)	Bob	Carol
Profit before guaranteed payments	$120,000	$120,000 total
Guaranteed payment	$0	$20,000 (to Carol)
Profit remaining (after G.P.)	$100,000	$100,000 (to split)
Share of remaining profit	$50,000	$50,000
Total taxable to each	$50,000	$70,000 (50k + 20k)
Form W-2 issued?	No (not an employee)	No (not an employee)
Self-employment tax due?	Yes, on $50k	Yes, on $70k

In practice, Bob and Carol likely take home roughly their shares in cash throughout the year. If the profits were different from what they withdrew, one might have an IOU from the company or just leave some profit in the business. But come tax time, each is taxed on their share as above.

They must also ensure the LLC keeps track of each member’s capital account (equity balance) as distributions and profits are allocated.

Example 3: Dave’s Tech Consulting LLC (LLC electing S-Corp)

Next up is Dave’s Tech Consulting LLC. Dave is the sole owner, and his business is doing well – say $150,000 profit per year. To save on taxes, he elected to have his LLC taxed as an S-corporation starting this year. Dave now is an employee of his own company for tax purposes.

How Dave Gets Paid: Dave wears two hats: he’s the owner and also an employee of his S-corp. This means:

The S-corp (Dave’s LLC) now runs a payroll. Dave must pay himself a salary for the work he does. After researching industry standards, Dave decides a reasonable salary for a consultant in his role is $80,000 per year. He pays himself roughly $6,667 monthly as a wage.
The LLC’s profit after accounting for his salary can be distributed to him as an owner distribution (dividend). Profit was $150k, minus $80k salary (which is now a business expense) = $70,000 left as net profit. That $70k can be paid to Dave as a distribution (all at once or in chunks).

Yes W-2, Yes Payroll Taxes: Because Dave is on salary, his company issues him a W-2 for that $80k at year-end. Throughout the year, the LLC withholds income tax and payroll taxes from Dave’s paychecks, and remits employer payroll taxes. On the $70k distribution, there are no payroll taxes (it’s not wage income).

Taxes: The S-corp will file Form 1120-S and issue a K-1 to Dave for the business income. Dave will report:

$80,000 of W-2 wages (which he already paid Social Security/Medicare taxes on via payroll).
$70,000 of S-corp income on Schedule E (from the K-1). This $70k is not subject to self-employment tax by virtue of the S-corp structure – it’s profit distribution.

Comparing Dave’s tax outcome with S-corp vs if he were a plain LLC:

As an S-corp, Dave pays payroll taxes on $80k salary. Social Security tax is 6.2% (employer + employee, effectively 12.4% total) up to the annual cap, and Medicare 2.9% (split between employer/employee). That’s roughly the same 15.3% combined on that portion (half paid by Dave, half by the company). On the $70k distribution, neither he nor the company pays Social Security/Medicare tax – saving what would have been $10,710 (15.3% of $70k) if it were self-employment income. He does pay ordinary income tax on the $70k, of course.
If he had not elected S-corp, as a sole proprietor he’d owe self-employment tax on the full $150k (about $22,950), versus about $12,240 total payroll taxes he and the company paid on the $80k salary. That’s a significant tax savings for him, demonstrating why S-corp status can be attractive at higher income levels.

Here’s Dave’s scenario in a table:

Dave’s S-Corp LLC	Amount	Tax Treatment
Salary (W-2) paid to Dave	$80,000	Deductible expense for LLC. Dave pays income tax on wages and about 15.3% in payroll taxes (split between employee and employer) on this $80k.
Remaining profit (distribution)	$70,000	Pass-through profit. No Social Security/Medicare tax on this amount (tax savings 💰). Dave pays income tax on it via K-1 (Schedule E).
Total income to Dave	$150,000	$80k wages + $70k distribution, all ultimately taxed as his income. (But by splitting into distribution, he saved on self-employment taxes on $70k.)
Compliance notes	–	Must file payroll reports (941s, W-2, etc.) and ensure salary is “reasonable”.

Dave’s example shows the benefit of the S-corp election: lower employment taxes. But it comes with more paperwork and the need to do payroll. If Dave’s profit were much lower (say $30k), an S-corp might not be worth the effort, which is why small LLCs often start as sole props and only elect S-corp when the savings outweigh the extra costs.

Example 4: Eve’s Art Supplies LLC (LLC electing C-Corp)

Finally, Eve’s Art Supplies LLC is taxed as a C-corporation. Eve has big expansion plans and wanted to keep profits in the company for growth, so she chose C-corp taxation. Her LLC (now a C-corp for tax) had $100,000 net profit this year before paying Eve.

How Eve Gets Paid: Eve, being the owner and also working as the CEO, decides to pay herself a salary of $70,000. She leaves the remaining $30,000 profit in the company (or it could be paid as a dividend to her – we’ll consider that scenario).

Taxes (Double Taxation in action): Eve’s company will file a corporate tax return (Form 1120) and pay corporate income tax on its profits.

On the $70,000 salary: The corporation deducts it as an expense, so that reduces taxable corporate profit. Eve receives a W-2 for $70k and pays income tax on it (and the company and Eve split the payroll taxes, as with any salary).
The $30,000 remaining profit in the corporation is taxed at the corporate tax rate (21% federal, so about $6,300 in tax). If Eve doesn’t distribute it, the company retains $23,700 after tax to reinvest.
If Eve does take that $23,700 out as a dividend to herself, she will then pay tax on the dividend on her personal return. If it’s a qualified dividend, say a 15% tax rate, that’s about $3,555 more in taxes for Eve.

So in total, that $30k profit was taxed twice: $6,300 at the corporate level and $3,555 at the individual level on the dividend. That’s a combined tax hit of about $9,855, which is roughly 33% of the original $30k. Meanwhile, her $70k salary was taxed once (to her, as ordinary income, plus payroll taxes).

If Eve had instead taken the full $100k as salary, the corporation’s taxable profit would be $0 (so no corporate tax), and she’d just pay personal income tax on $100k (and payroll taxes). Usually, owner-employees of a C-corp try to pay out most profits as salary or bonuses (to avoid the double tax on dividends). However, very high salaries can attract IRS attention if they suspect it’s to dodge corporate tax, but that’s more an issue for huge companies.

Eve’s scenario summarized:

Eve’s C-Corp LLC	Amount	Tax Treatment
Salary to Eve (W-2)	$70,000	Deductible to company. Taxable to Eve as wage income (plus payroll taxes).
Remaining corporate profit (pre-tax)	$30,000	Taxed at 21% corporate rate = $6,300 corporate tax. Leaves $23,700 after tax in company.
Dividend to Eve from after-tax profit	$23,700 (if distributed)	Taxable to Eve as dividend (around 15% rate = ~$3,555). Company cannot deduct dividends.
Combined tax on $30k profit	$6,300 (corp) + $3,555 (personal) = $9,855	Effective tax ~33% on that portion of income, in addition to tax on salary.
If paid as salary instead	$100,000 (salary)	Corp profit $0 (no corp tax). Eve pays income tax on $100k wages (and payroll taxes). No double taxation in this case.

As you can see, C-corp taxation can result in higher overall taxes on the owner if profits are distributed as dividends (the classic “double taxation” problem). Many small business LLCs avoid C-corp mode for this reason, unless there’s a specific benefit like major reinvestment plans, easier access to venture capital, or the owner is okay leaving profits in the company long-term. The majority of small LLCs opt for pass-through taxation (sole prop, partnership, or S-corp) so that business profit is taxed only once.

Bottom Line: Yes, an LLC owner does get paid – but the form that payment takes will vary. By understanding these distinctions, you can choose the most advantageous way to compensate yourself while staying compliant. ✅

Now, let’s answer some frequently asked questions to clear up any remaining doubts.

FAQ

Q: Can an LLC owner draw a salary?
A: Not in a default LLC. Only if the LLC elects S-corp or C-corp status can the owner be on payroll and receive a W-2 salary. Otherwise, owners take draws from profit, not formal salaries.

Q: How do I pay myself in a single-member LLC?
A: By taking an owner’s draw – simply transfer money from the business account to your personal account. There’s no formal paycheck. Take profit out as needed, but remember you’ll owe taxes on that profit.

Q: Is an owner’s draw taxable income?
A: Not directly. An owner’s draw isn’t taxed when you take it out. However, you will pay income tax (and self-employment tax) on the profits of the LLC that you draw from.

Q: What is the self-employment tax for LLC owners?
A: It’s the 15.3% tax for Social Security and Medicare (the self-employed equivalent of FICA). Essentially, LLC owners pay ~15.3% on business net earnings. Electing S-corp can reduce the amount subject to this tax.

Q: Should I elect S-Corp status for my LLC to save on taxes?
A: Possibly, if your profits are high enough. S-Corp status can cut self-employment tax on part of your income, but comes with extra paperwork (payroll, filings). It’s usually worth considering once you have ~$50K+ in profit.

Q: Can I reinvest all my LLC’s profit instead of paying myself?
A: Yes. You can choose to leave all profits in the business to reinvest. Just remember you’ll still owe income tax on those profits, even if you don’t take any money out for yourself.

Q: Are LLC profit distributions considered income?
A: Yes. For tax purposes, profit distributions are considered personal income. In a pass-through LLC, you pay tax on the profit allocated to you, whether or not you actually withdraw it as cash.