How to pay yourself as an LLC small business owner

One of the best feelings of running a business? Seeing your hard-earned money in your bank account. One of the not-so-good feelings? Wondering how that actually works.

To help you get those warm-and-fuzzy payday feelings back, we’ll use this article to review how to pay yourself as an LLC, including LLCs of all levels: single-member, multi-member, and corporate LLCs.

Here’s a little TLDR on how to pay yourself as an LLC:

• An LLC limits the liability of its owners, so if the business is in trouble, the owners don’t have to pay with personal debt
  
  
• There are three different types of LLCs: single-member, multi-member, and corporate, and each have a different way of paying their owners
  
  
• An owner’s draw lets single- and multi-member LLC owners use a portion of their profits as pay, and the frequency and amount are up to the owner’s discretion
  
  
• Owner’s draws aren’t subject to tax withholdings as they come out, but it’s still considered taxable income and needs to be reported to the IRS
  
  
• Corporate LLC owners are required to pay themselves a salary that comes out of the company’s payroll
  
  
• To ensure profits are tracked and reported properly, organization of payroll and accounts are critical for LLCs, throughout the year and also during tax time

What is an LLC?

Before we jump into the dollars, let’s talk about what an LLC is.

The acronym LLC stands for “limited liability company.” It’s a type of business structure that provides the legal and financial protection of a corporation, plus the tax benefits of a sole proprietorship. So yes, you get your cake and can eat it, too. 🍰

How do I pay myself from my LLC?

Onto the good stuff: how to pay yourself.

There are three types of LLCs: single-member, multi-member, and corporate LLCs. Depending on the type of LLC you own and operate, paying yourself will look a bit different.

For instance, an owner’s draw applies to both single-member and multi-member LLCs, but not corporate. Keep reading for more on this method and others.

The owner's draw: What it is and how it works

An owner’s draw is a common method of payment for owners of single- or multi-member LLCs. It works by transferring a portion of your business’s cash reserves to you and/or the other business owners as a form of payment. If you’re in a multi-member LLCs, these draws are typically divided between the owners. 

Paying yourself as a single-member LLC

Paying yourself as a single-member LLC is similar to how a sole proprietor would do it: via an owner’s draw. An owner’s draw is different from a salary because you can determine both the amount and frequency. Pro tip? Leave enough money in your business account to keep the lights on and to keep growing.

Now, when it comes to taxes, the IRS views your business as something called a “disregarded entity.” This means that you—the owner—and your business are one and the same, and your profits are regarded as personal income.

Although your income won’t be taxed as it comes out via your owner’s drawer, it will be subject to taxation at tax time, so keep track of your profits and what’s coming out of them.

Paying yourself from a multi-member LLC

If you’re part of a multi-member LLC, this means you’re classified as a “partnership” and the IRS will treat your LLC as a “pass-through entity.” Your business income will still be reported to the IRS, but rather than your business being taxed, each member’s share of the profits will be treated as personal income.

When it comes to the process of paying yourself, multi-member LLCs pay themselves in the same way as single-member LLCs—via owner’s draw.

If partners agree that their finances can handle it, they can work out guaranteed payments for each owner. This is similar to salaries, in that they’re paid out no matter how the business performs. 

Paying yourself from a corporate LLC

If your LLC has elected to be treated as an S corp or C corp, its members (also known as shareholders) are not allowed to take an owner's draw.

So, how do they get paid? A salary. This salary must be set and paid out of the company’s payroll, and paid with all appropriate taxes.

Determining the amount can be done by the owner, but it has to fall under “reasonable compensation” based on the IRS’s definition, which is: “the value that would ordinarily be paid for like services by like enterprises under like circumstances. Reasonableness is determined based on all the facts and circumstances.”

Want more than just a salary? Good news: if you’re a corporate LLC owner, you can decide whether or not you want to pay yourself with dividends on the company's profits. While these dividends don’t require payroll taxes to be withheld, they’re still considered taxable income.

Paying yourself from an LLC FAQs

How are owner's draws taxed?

Different LLCs have different tax obligations which are detailed below. However, with an owner’s draw, there’s no tax withholding. That said it’s still considered taxable income and it has to be reported to the IRS, meaning any and all required taxes will have to be paid at that time.

But here’s a tax tip to soften the blow: consider making quarterly estimated income tax payments using IRS Form 1040-ES. When you pay throughout the year, tax time is much less daunting.

• Single-member LLC: Instead of filing a separate IRS return, simply report your profits and losses on Schedule C of your personal tax return. You’ll have to pay income tax on your LLC’s profits, even if you have or haven’t drawn the entire amount as part of your owner’s draw. You’ll also have to pay self-employment tax to cover Social Security and Medicare.

• Multi-member LLC: Each member of your LLC will file their unique percentage of the LLC’s profits and losses on their individual tax returns. This means you won’t each file a separate business tax return. Each member will owe income tax on the full amount of their profit share, even if they have not drawn that entire amount. Just like single-member LLCs, each member is required to pay self-employment tax for Social Security and Medicare.
  
  Lastly, multi-member LLCs have to file IRS Form 1065 and file a Schedule K-1 for each member. This is a one-page form that outlines each partner’s share of income, deductions, and credits.

• ‍Corporate LLC: If you’re an owner of a corporate LLC, you’ll receive a salary which will withhold all of the required taxes before your payment hits the bank. This means that corporate LLCs are taxed as C corporations and are required to file a business tax return, meaning that you could be taxed in two ways: at the corporate level and individually. This is called double taxation.Is your LLC an S corp? Then you won’t pay corporate taxes but instead pass your income directly to your owners.

How much should I pay myself from an LLC?

As an owner of an LLC, you’ll need to pay yourself a reasonable amount (especially if you have a salary).

For owners who get a salary, consider what you have to have in the bank to cover your annual personal expenses. You can also look at the market to view averages for similar roles.

When it comes to an owner’s draw, the amount should still be reasonable, but you’re able to determine frequency and amount.

Just remember to keep enough in the bank to keep everything operating smoothly and growing according to plan. Also remember that you’ll have taxes to take care of, so keep a healthy amount of funds in your business account. 

Do you have to take a salary from your LLC?

No, you are not required to take a salary from your LLC. As a single-member or multi-member LLCs, you have a variety of options to consider: owner’s draw, profit distributions, a salary, or you can pay yourself as an independent contractor. As a corporate LLC, you can only choose the salary option.

That said, you don’t have to take any funds from your business to pay yourself, especially if your business isn’t generating enough money to pay you.

The bottom line: Paying yourself as an LLC

The bottom line of paying yourself as an LLC small business owner is simple: if you can, pay yourself, and do so reasonably.

Depending on how much money your business is making, you can take out an owner’s draw that still allows for the operations of your company to run smoothly. It’s also important to make sure that there’s enough funds in the bank to facilitate growth. This is where organization of your books comes in handy—what’s coming in, going out, and what’s trending for the months ahead.

If you’re a corporate LLC, payment looks a bit different. If the business’s financials allow for it, you’ll be able to receive a salary that’s set and paid by your payroll. Keep in mind the double taxation rule, where first your business is taxed, and then your salary at the individual income level.

All of the above can be done simply and accurately with support from payroll software, like Wave’s. Because when you’re an owner of an LLC, you’ve got a lot on your mind—money, included. And wouldn’t it be nicer if that money was off of your mind and growing in the bank? We think so.