How to Pay Yourself from Your LLC
An LLC owner is usually paid by taking money out of the business, not by receiving a paycheck. In a default single-member LLC you take an owner's draw. In a multi-member LLC you take distributions. If the LLC elects to be taxed as an S corporation, the owner who works in the business must take a reasonable salary through payroll. Which route applies depends on how the LLC is taxed.
Key takeaways
- Default LLC owners are not employees, so they take draws or distributions rather than wages.
- Moving money to yourself is not taxed at the moment you take it; the profit is what gets taxed.
- An LLC that elects S-corp status must pay working owners a reasonable salary with payroll tax.
- Payroll tax is 7.65 percent for the employee and 7.65 percent for the employer, or 15.3 percent for the self-employed.
- Keep company and personal money separate, or you can weaken your liability protection.
Draws, distributions and salary: what they mean
These three words are used loosely, so it helps to define them.
- Owner's draw. Money a sole owner takes out of the business bank account. It is not an expense of the company and it is not a salary.
- Distribution. Money paid to members of a multi-member LLC according to the operating agreement. Usually proportional to ownership, though the agreement can say otherwise.
- Salary. A regular wage paid through payroll, with tax withheld. Required for working owners of an S corporation. Not used for a default LLC.
A draw or distribution simply moves cash. What creates tax is the LLC's profit, whether or not you take that profit out. This surprises many founders: you can owe tax on profit you left in the account.
How the tax treatment shapes how you pay yourself
The IRS does not have a separate category for an LLC. The way you are paid follows the tax classification you choose, or the default one.
| LLC classification | How the owner is paid | Payroll required? |
|---|---|---|
| Single-member (disregarded) | Owner's draw | No |
| Multi-member (partnership) | Distributions, sometimes guaranteed payments | No |
| S corporation election | Salary plus distributions | Yes, for working owners |
| C corporation election | Salary, dividends | Yes, for working owners |
Our articles on LLC taxation and LLC vs S-Corp explain those choices in more detail.
Payroll tax rates in one place
When you are paid a wage, Social Security and Medicare tax apply. An employee pays half through withholding and the employer pays the other half. A self-employed person pays both halves.
| Who pays | Rate |
|---|---|
| Employee share | 7.65% |
| Employer share | 7.65% |
| Self-employed total | 15.3% |
The Social Security part of these rates stops at an annual wage base, described in our self-employment tax guide. The Medicare part continues on all earnings.
Paying yourself as a non-US owner
Most of our readers live outside the United States and own a single-member LLC. For them the process is simpler than it sounds. A foreign owner of a disregarded LLC takes draws, moves the money from the LLC bank account to their own account, and records each transfer. There is no payroll and, in general, no self-employment tax for a nonresident alien.
The tax question is separate. Some income can be effectively connected with a US business and taxed by the US, and the rest may be taxed only in your home country. Get advice on this, because it depends on where the work is done and where customers are. The non-US resident tax guide gives the overview.
For a multi-member LLC with foreign partners, the LLC may have to withhold US tax on the foreign partners' share of income and file Form 1065 with foreign-partner forms. That is another reason to keep a CPA involved.
Steps to set up a clean payment routine
- Keep a dedicated business account. Do not run business receipts through a personal account. See how to open a US business bank account.
- Decide a pattern. Monthly transfers are easier to track than random ones. Leave a cash buffer for tax, refunds and slow months.
- Label every transfer. Use a note such as "owner draw" so your books show it is not an expense. Our bookkeeping guide shows how.
- Record it in the books. The draw reduces owner's equity. It does not go into profit and loss.
- Set aside tax money. Put a share of each receipt in a separate account so you are not scrambling at filing time.
If you elect S-corp status: reasonable salary
When an LLC is taxed as an S corporation, the IRS expects a working owner to be paid a reasonable salary before taking distributions. That salary carries payroll tax and needs Form 941 filings, W-2s and state payroll accounts. "Reasonable" means what you would pay someone else to do your job, not the lowest number. S-corp status is generally not open to an LLC with non-US shareholders, which rules it out for many of our readers, so check eligibility first.
A simple example
Suppose Amara runs a consulting LLC from Lagos. The LLC has one member, no employees and a US bank account. In a year the LLC collects $60,000 and pays $10,000 of business expenses, so profit is $50,000. During the year Amara transfers $3,500 a month to her own account, which is $42,000 in draws.
In the books, the $42,000 is not an expense and does not change profit. Profit is still $50,000, and the remaining $8,000 stays in the LLC as equity. Whether any US tax is due on that profit depends on her residency and on whether the income is effectively connected with a US business. Her home country may tax the full $50,000 whether or not she withdrew it. The example shows why the draw and the tax are two separate questions.
What to tell your accountant
A good accountant needs four facts from you before they can say how to pay yourself: where you live for tax purposes, how the LLC is classified with the IRS, how many members it has, and where your clients are. Bring your bank statements and your operating agreement. With those, they can tell you whether draws are enough, whether a payroll election is possible, and what your home country will want to see.
Mistakes that cause trouble
Paying personal bills from the LLC account
Mixing personal and business spending is the fastest way to blur the line between you and the company. Courts can use that against you when someone tries to reach your personal assets.
Treating a draw as a business expense
Draws are not deductible. If your books show them as expenses, your profit will be understated and your tax return wrong.
Taking out more than the company earns
Distributions that leave the company unable to pay its debts can be reversed in some situations. Keep cash for taxes and bills.
Forgetting state or home-country rules
Your country may treat draws as income when received. Ask a local accountant how the transfers are reported.
Frequently asked questions
Can I pay myself a salary from a default LLC?
Not as an employee. A default single-member or multi-member LLC owner takes draws or distributions. Wages are for an S or C corporation election.
Do I pay tax when I take a draw?
The draw itself is not taxed. Tax applies to the LLC's profit for the year, whether or not you took it out.
How often should I pay myself?
Pick a schedule you can keep, such as monthly, and keep a cash buffer. The law does not set a frequency for draws.
Do non-US LLC owners need payroll?
Generally not for a disregarded single-member LLC. Payroll is needed if the LLC elects corporate treatment and pays you wages.
What is a guaranteed payment?
It is a payment to a partner for services or capital that does not depend on the LLC's profit. It applies to multi-member LLCs taxed as partnerships.
Need a second opinion on your setup? Our tax preparation and planning service or a quick call can help.
