Whether you’re a one-person show or employ other people, forming a limited liability company (LLC) can be a great idea. Forming an LLC means you’re not personally liable for your company’s debts. It’s your company, but it’s also somewhat separate from you.
So how are you supposed to pay yourself for the work you do in your own business?
It’s easy. There are several self-payment options to pick from. Just make sure that whatever you choose, you keep track of what you pay yourself. You’ll need to report it to the IRS.
So, How Do You Pay Yourself from an LLC?
You make an owner’s draw from LLC profits. That’s the easiest way, in our opinion.
So what is an owner’s draw?
It’s simply a withdrawal from your LLC’s business bank account for your own personal use. In other words, so that you can pay your personal bills, like the mortgage or rent. Whatever you don’t withdraw will stay in your LLC’s business bank account for all your business-related costs.
Here’s an example.
Tammy, a florist, owns Blooms, a flower shop in downtown Anywhere, U.S.A. She’s the sole proprietor of the LLC and as of now, she has no employees. It’s just her.
After one very busy month of business, Tammy’s shop has earned a revenue of $25,000. The gross profit—the amount left after she subtracted production costs like her lease and the cost of goods sold—was $10,000. And after deducting taxes and other general expenses, she’s left with a net income of $7,000.
As the sole proprietor, Tammy can choose to withdraw all, some, or none of this money for her personal use.
She decides to withdraw $5,000 to pay herself, leaving the other $2,000 in her LLC’s bank as equity.
That $5,000 is Tammy’s owner’s draw from the profits of her single-member LLC.
She can either transfer the money from her business bank account to her personal account or withdraw it as a check.
If she makes roughly the same amount in revenue each month, she can set up regular monthly draws. Or, if she wants to withdraw money based on how her business is performing, she can withdraw money manually each week or month.
Record Every Transaction
It’s important to keep a record of every owner’s draw you make, even if you own a single-member LLC. You can do this by using an accounting or payroll software service like Freshbooks, Gusto, or Paychex.
You’ll have a cash account, which keeps track of your LLC’s income. Then you’ll have an owner’s equity account, which will track the amount of money you, the sole proprietor, has withdrawn from your business.
To record a draw, you’ll debit your owner’s equity account and credit your cash account.
For our hypothetical flower shop owner, Tammy, the transaction would look like this:
|Owner’s Equity Account||$5,000|
You can also create a sub-account under your Owner’s Equity Account if you plan to take frequent draws.
Are You Taxed on When You Pay Yourself From an LLC?
Not exactly. There are three main types of LLCs, and they are all taxed in different ways:
- Single-Member LLC: the IRS treats single-member LLCs like sole proprietorships. You’ll keep track of your LLC’s revenue, deduct applicable expenses, and pay taxes on the total income of your business. State and local governments typically treat LLCs in a similar way, although there may be added taxes to pay, like California’s $800 LLC tax.
- Multi-Member LLC: the IRS treats multi-member LLCs as pass-through entities for federal tax burdens. So, like with a single-member LLC, you and your partner(s) will keep track of the LLC’s revenue, deduct applicable expenses, and pay taxes on the total profit on the total income of your business. But instead of one person shouldering the tax burden, you’ll split it according to who owns what share of the partnership. A 50-50 partnership would split it equally in two, for instance.
- Corporate LLC: in a corporate LLC, the business is taxed as a corporation and owners must pay themselves a set salary. In other words, owner’s draws aren’t allowed, and you’ll need to follow all the corporate tax laws set forth by federal, state, and local governments.
In short, only single- and multi-member, non-corporate LLCs can take owner’s draws. If and when you make an owner’s draw doesn’t change how much you pay in taxes. You’ll already be paying taxes on the revenue minus deductions. And owner’s draws do not count as deductible expenses.
What if There Are Multiple People in the LLC?
When there are multiple people in an LLC, each person owns a share in the company. If Tammy decides to partner with two other people, Amir and Rose, they could decide to split the shares three ways. This means they each have a 33.33% share in the company.
Each owner can withdraw an owner’s draw from their share of the flower shop. So if the shop makes $15,000 in net income in one month, each person could withdraw up to $5,000. Or, they could leave some or all of it as equity in their share of the business.
Taxes get a little more complicated with multi-member LLCs, but they’re not too confusing. Everything is just split into halves, or thirds, or fourths, or whatever setup you and your partners have agreed upon.
Let’s go back to Tammy, Amir, and Rose. These three owners of Blooms, LLC will each need to pay 33.33% of the company’s taxes. Each member will also be able to deduct 33.33% of the company’s deductible expenses and credits on their personal tax returns.
As with a single-member LLC, when and how much the members withdraw from their shares has no impact on the business’s tax burden.
Are There Other Ways to Pay Yourself From an LLC?
Yes, but they are a little more complicated. Let’s take a look.
Pay Yourself as An Employee
You can choose to be treated as an S-corporation for tax purposes (if eligible). This allows you to give yourself a W-2. In other words, you might own the company, but you’ll officially count as an employee. As such, you will be required to pay yourself a reasonable, fixed salary.
You can also receive pass-through distributions from the business’s net income, but owner draws are not allowed.
The perk here is that only the wages you pay yourself—and any other owner-employees—are subject to the 15.3% FICA tax (Social Security and Medicare). Distributions from the company’s net earnings are not.
But these distributions may still be taxed at your individual income tax rate—which could be lower than 15.3% or much higher if your income puts you in a mid- to top-tier tax bracket.
And you can’t pay yourself strictly in distributions.
You must pay yourself a reasonable wage. Distributions must be modest and cannot take the place of your salary.
How is this different from an LLC taxed as a sole proprietorship or partnership? With a regular LLC, all of the business income is subject to self-employment tax, which pays into Social Security and Medicare just like FICA tax does. And you get to deduct the employer portion of that tax—so 7.65%—from your adjusted gross income.
If you file as an S-corp, you’ll get to write off that same 7.65% as a business expense, but this will only affect the salary you pay employees. Not the distributions you take in addition to those salaries. So you lose a potentially valuable deduction there.
However, this option can be worth it depending on your finances, your company’s health, and your business structure. The tax dance is complex. We recommend speaking with a tax expert to figure out if filing as an S-corp is worth it for your LLC.
Pay Yourself as a Contractor
If you own but don’t really operate your own LLC, it might be worth it to pay yourself as a 1099 independent contractor. Maybe you do the odd job here and there but mostly leave the LLC to run with managers and employees in place.
Instead of paying yourself with regular owner draws or with a salary, you want to keep the money flowing to your employees and to the business. So you decide to treat yourself as an independent contractor, paying yourself for each job you do for the company just like you would for any other independent contractor.
The hitch here? You’ll have to pay taxes on the income the LLC earns. You’ll also need to pay self-employment taxes on the income you paid yourself as an independent contractor. Which means you’re paying the same taxes twice on that portion of your company’s income.
It’s not the biggest win in our book, but you can always explore the option with advice from your tax professional.
How Often Should You Pay Yourself?
Like everything else, it all depends on your unique situation.
Say you’ve got a hands-on role in operating and managing the LLC. Your business pulls in a steady income. In this case, taking owner draws on a regular payment schedule can work well.
If you want to take advantage of being taxed as an S-corp, you’ll pay yourself a regular monthly salary instead. You can also take distributions, but you’ll need to keep them small.
And finally, if you’ve built a set-it-and-forget-it LLC, you can pay yourself as an independent contractor each time you complete a business task.
Our guide to pay frequency can help you figure out when to pay yourself and your employees.