How to pay yourself from an LLC
icon May 12, 2025
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Business Taxes, IRS Compliance, LLC Management, Small Business Tips

Wondering how to pay yourself from your LLC? Whether you own a single-member, multi-member LLC, S Corporation LLC, or C Corporation LLC, understanding the right way to take money out of your business is crucial for tax savings and legal compliance.

In this video, we break down:

  • The difference between owner’s draw and salary
  • How taxes work for single vs. multi-member LLCs
  • When to pay yourself through payroll
  • Common mistakes to avoid when taking distributions
  • Pro tips to stay IRS-compliant and reduce your tax bill

👉 Perfect for small business owners, freelancers, and entrepreneurs.

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⚠️ DISCLAIMER

This video is intended for education purposes and should not be taken as legal, financial or tax advice.  You should consult with a professional about your unique situation before acting on anything discussed in these videos.  Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. are providing educational content to help small business owners and individuals become more aware of certain issues and topics, but it cannot give blanket advice to a broad audience.  Things are always changing, therefore, this channel may not contain the most up-to-date information.  Neither Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. nor its members can be held liable for any use or misuse of this content.

TRANSCRIPTION

Hey everyone, welcome back to the channel. Today we’re diving into one of the most common questions I get from new, and sometimes not so new, business owners. And that is, how do I pay myself from my LLC? Whether you’re a freelancer, an entrepreneur, you have a side hustle. Understanding how to legally and efficiently take money out of your LLC is really important, not just for your wallet, but for taxes too.

So don’t go anywhere, because by the end of this video, you’ll know exactly how to pay yourself the right way from your LLC. The first thing you need to know is what type of LLC do you have in the eyes of the IRS? Even though you may have formed a limited liability company with your state, the IRS doesn’t recognize LLC as a tax classification. They treat your LLC based on how many owners it has and what election you’ve made.

Here are the main options. You have the single member LLC, which by default, you’re treated as a disregarded entity. The IRS sees you as a sole proprietor, it doesn’t see the LLC.

You also have the multi-member LLC, which by default is considered and treated as a partnership. The LLC can also elect to be taxed as an S-corp or a C-corp, and that is done by filing form 2553 or 8832, and it must be accepted. So depending on which you are a member of affects how you pay yourself.

So let’s break that down. If you’re a single member LLC, there’s no employees, it’s just you. Your LLC is called a disregarded entity.

This basically means that your entity is, well, disregarded. The LLC itself doesn’t matter, or the LLC doesn’t have its own tax identity or obligation, but rather the IRS looks to the sole owner or member to declare the activity. If the member is a person or an individual, it will treat you like a sole proprietor.

That means that you don’t pay yourself a salary. Instead, you’re going to take an owner draw. Why is that? Because at the end of the day, when you declare the LLC’s income and expenses, you do it on your own personal taxes.

It goes on schedule C, the same place that you declare any 1099 that you receive. You pay income tax and self-employment tax on all of the profit. So what does that mean? You transfer money from your business bank account to your personal bank account, and that’s it.

No payroll, no W-2, just a transfer. You pay yourself whatever you need to, keeping in mind that you don’t deplete the business account. You should, however, make sure that you, number one, keep good records of those draws.

Number two, you should have separate business and personal bank accounts. You should not treat the business account as your own personal account. Number three, you should save money for taxes, because even though it’s not a paycheck, you still owe income tax and self-employment tax on your net profit.

So let’s say you’re a single member LLC, and your business makes $80,000 in profit after your expenses this year. You decide to pay yourself $4,000 per month as an owner’s draw. That money is not deductible as an expense for the business.

It’s just a distribution of the profit. When tax time comes, you’re going to report the full $80,000 on your schedule C, and you’ll owe income tax and self-employment taxes on the $80,000, even if you only took out $48,000 in actual draws. But that’s why it’s important to track both your business income and your draws.

Now, let’s say your LLC has multiple members. The IRS treats it as a partnership by default. Important to note that you still don’t take a salary.

Instead, each member takes an owner’s draw based on their percentage of ownership. You have to keep that percentage of ownership in mind. At tax time, the LLC is going to file Form 1065, and each member gets a K-1 showing their share of the profit or the loss.

Again, taxes are due on your share of the profit, whether or not you actually took the money out. Now, partnerships can get tricky because you need to keep in mind what each member gets paid or draws. It’s supposed to be based on the profits and their basis in the company.

You may pay yourself and the other member or members throughout the year, assuming that the business will turn a profit, but it may not. So I mentioned the word basis. You may be wondering what that is.

A member’s basis is their ownership interest in the LLC. Okay? So think of it like your tax cost in the LLC. It starts with your initial contribution, and that could be cash.

It could be property or services. It’s then adjusted each year for increases or decreases. Now, increases are any additional contribution that you’ve made, the share of the LLC’s income, and share of the LLC debt if it’s taxed as a partnership.

What can be considered a decrease? Decreases are distributions you’ve received, your share of the losses, and non-deductible expenses. So why is basis important? Because if there is a loss, you can only deduct your share of the LLC loss up to your basis. So if your basis say $5,000 and the LLC passes you a $7,000 loss, you can only deduct up to $5,000 of that loss because that was your basis.

Distributions are not taxable if they don’t exceed your basis. If you take out more than your basis, the excess is a taxable gain. Basis is used also to calculate whether you have a capital gain or loss when and if you sell your LLC interest.

So let’s look at an example and see this with numbers. Let’s say you invest $10,000 in an LLC. In year number one, you get a $3,000 of income.

The basis increases then to $13,000. You then take a $2,000 distribution, so the basis drops to $11,000. In year two, the LLC has a $4,000 loss, so that means the basis is going to drop to $7,000.

If you try to deduct more than that $7,000 in losses in future years, the IRS won’t allow it unless your basis increased. There are times when besides splitting the profits, a member gets paid a salary to do a certain function in the business. These are called guaranteed payments, and I’m not going to get into the weeds on this video, but the bottom line is that members of a partnership should not be on payroll unless there is a stipulation that someone will get guaranteed payments.

Now here’s where things get a little more structured. If your LLC elected to be taxed as an S or a C Corp by filing forms 2553 or 8832, the rules change. In this scenario, you must pay yourself a reasonable compensation as an employee of that business.

If you’re an active member, this means that you are going to run payroll. You pay yourself through W-2 wages, you withhold payroll taxes, and you’re going to file quarterly payroll reports. But you can also take distributions of profit on top of your salary, and those distributions are not subject to self-employment tax, just regular income tax.

So why do people do this? Why do they elect S Corp? To potentially save money on self-employment taxes, but it comes with more paperwork and payroll obligations. So talk to a tax pro before switching to an S Corp. The S Corp is a great tax saving strategy, but it is not designed to help you evade taxes.

Two totally different topics. Active officers in an S Corp must have reasonable compensation paid via payroll throughout the year. This is a high risk area that gets a lot of people audited frequently, so you have been warned.

Please pay attention to this topic. No matter how your LLC is taxed, here are a few of the golden rules. Number one, keep your business and personal finances separate.

You can open a separate business bank account or several bank accounts. You should use accounting software or spreadsheets to track everything. Number two, don’t take more money than your business can afford.

In other words, always leave enough money in there for taxes and operating expenses. You don’t want to deplete the account. Number three, pay yourself consistently.

Whether that’s weekly pay, bi-weekly, monthly, set a schedule so you’re not constantly guessing. Number four, make a plan for your taxes. Don’t ignore them because they are coming.

Set aside 25 to 30% of your net profit for your taxes if you’re self-employed. Consider paying quarterly estimated payments throughout the year to help you stay ahead of the game and not get such a hit from tax time. So let’s wrap it up with some quick don’ts.

Don’t pay yourself under the table. Keep records and use your bank account. Don’t co-mingle funds.

This is a big one. Avoid mixing personal and business expenses. Your business is a separate entity from you.

Please don’t get that mixed up. Don’t forget your taxes. Just because you’re not getting an actual paycheck doesn’t mean the IRS isn’t expecting their cut. Don’t guess your salary if you’re an S-Corp. Use industry benchmarks or consult a professional. To wrap it up, paying yourself from your LLC isn’t complicated but it does depend on how your business is taxed.

Whether it’s a simple owner’s draw or a structured salary, following the rules keeps your business healthy and the IRS happy. If this helped you, give it a like, subscribe for more tips, and let me know in the comments how you pay yourself from your LLC. And if you want a video on LLC versus S-Corp or estimated taxes, let me know.

We’ll go ahead and try our best to make that for you. Thanks for watching and I’ll see you next time. – End of translation

SUMMARY

LLC Owners: Here’s How to Pay Yourself Legally and Avoid IRS Trouble

How to pay yourself from an LLC is one of the most misunderstood topics for small business owners, freelancers, and side hustlers alike. Many assume that forming an LLC gives them a simple framework to start earning income, but few understand how payment methods differ depending on IRS classification.

At Freedom Tax Accounting, we see this issue come up constantly. If you own an LLC, whether it’s a single-member setup or a multi-member business, you need to know how the IRS views your entity and what that means for taking money out legally and efficiently — especially to avoid payroll mistakes or audits.

Single-Member LLCs: The “Disregarded Entity” Reality

If you’re the only owner, the IRS treats your LLC as a disregarded entity. Legally, your LLC exists under state law, but for tax purposes, it’s ignored. You’re taxed just like a sole proprietor, and here’s what that means:

  • No payroll
  • No W-2 or salary
  • You simply take an owner’s draw — a transfer from your business bank account to your personal account

This draw is not deductible by the business. Instead, all profits are reported on Schedule C of your personal tax return, and you pay income tax and self-employment tax on the net business income — even if you don’t actually withdraw all of it. So if your business earns $80,000 but you only draw $48,000, you still pay taxes on the full $80,000.

Key tips:

  • Keep personal and business accounts separate
  • Track every draw carefully
  • Set aside 25–30% for tax payments

Multi-Member LLCs: Partnering Comes With Paperwork

If your LLC has multiple owners, the IRS treats it as a partnership by default. Instead of a Schedule C, the LLC files a Form 1065, and each member receives a K-1 form showing their share of profits or losses.

You still don’t receive a salary. Each partner takes a draw proportional to their ownership interest. These draws are also not deductible business expenses. You pay tax on your portion of the profit, regardless of whether you took the money out.

Another concept that matters here is basis. Your basis is your investment in the business, and it changes over time depending on contributions, profits, losses, and distributions. You can’t deduct losses beyond your basis. Also, taking more than your basis as a distribution could result in a taxable capital gain.

Electing S-Corp Status: When Payroll Becomes Mandatory

Things change significantly if you elect to be taxed as an S-Corporation. In this case, you’re no longer taking owner’s draws. You’re now required to:

  • Run payroll
  • Pay yourself a reasonable salary (W-2)
  • Withhold and remit payroll taxes
  • File quarterly payroll tax reports

On top of your salary, you may still take distributions. These aren’t subject to self-employment tax, making this a strategic move to potentially reduce tax liability. But don’t misuse it — if you underpay yourself to dodge payroll taxes, the IRS may audit and penalize you.

Golden Rules for Paying Yourself from Your LLC

No matter how your LLC is taxed, follow these best practices:

  1. Separate finances
     Never mix business and personal money. Open a separate bank account.
  2. Don’t drain the account
     Keep enough funds for taxes, operations, and emergencies.
  3. Be consistent
     Whether weekly or monthly, set a schedule for paying yourself.
  4. Plan for taxes
     Save at least 25–30% of net profit and make quarterly estimated tax payments if needed.
  5. Don’t guess your salary (for S-Corps)
     Use industry benchmarks and consult a tax pro to set reasonable compensation.

What NOT to Do

  • Don’t pay yourself under the table
  • Don’t co-mingle business and personal funds
  • Don’t forget that draws aren’t deductible expenses
  • Don’t assume W-2 rules apply to all LLCs — they don’t unless you’re an S-Corp

Learn More About LLC Payments and Taxes

  • IRS: Single Member LLC Information
  • IRS Form 1065 – Partnership Return
  • IRS Form 2553 – S-Corp Election

About Freedom Tax Accounting

Freedom Tax Accounting & Multiservices, Inc. has proudly helped small business owners across Florida and the U.S. navigate complex tax questions for over 20 years. Whether you’re running a solo venture or managing multiple partners, we help you stay compliant, avoid audits, and maximize savings. We specialize in LLC formation, S-Corp elections, bookkeeping, and payroll services.

📍Located in Kissimmee, FL
 📞 Call 407-344-1012 or visit freedomtaxaccounting.com to schedule your consultation today.

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