The owner of an LLC gets paid in one of three ways depending on how the business is taxed: a single-member owner takes an owner’s draw from the business account, members of a multi-member LLC receive distributions (and sometimes guaranteed payments) based on the operating agreement, and any owner whose LLC has elected S-Corp or C-Corp taxation must run a formal salary through payroll before taking anything else out. No taxes are withheld from draws or distributions, so the tax bill lands on your personal return instead of your paycheck.
Taking an Owner’s Draw From a Single-Member LLC
A single-member LLC is a “disregarded entity” for federal tax purposes, meaning the IRS treats you and the business as one taxpayer.1eCFR. 26 CFR 301.7701-3 – Classifications of Certain Business Entities To pay yourself, you transfer money from the business bank account to your personal account and record it as a reduction in owner equity. Nothing is withheld at the time of transfer.
Before pulling money out, check that the business has enough cash and accumulated equity to support the withdrawal. Your equity account should stay positive after the draw. Taking more than the business can support is not a legal violation on its own, but it creates bookkeeping problems and can signal financial distress.
Here is the part that surprises new owners: the amount you draw has nothing to do with what you owe in tax. You report the business’s full net profit on Schedule C of your Form 1040, whether you moved that money into your personal account or left it sitting in the business.2Internal Revenue Service. Single Member Limited Liability Companies A draw is not a business expense, and it does not reduce your taxable income.
Distributions and Guaranteed Payments in a Multi-Member LLC
A multi-member LLC is taxed as a partnership by default, and the operating agreement controls how profits get divided. Most members receive distributions proportional to ownership: a 40% owner receives 40% of the profit allocated for payout.
Members may also receive guaranteed payments, which are fixed amounts paid for services or capital, owed whether or not the business turned a profit that period.3eCFR. 26 CFR 1.707-1 – Transactions Between Partner and Partnership The partnership deducts guaranteed payments as a business expense, which reduces the net income flowing through to all members. Guaranteed payments carry self-employment tax on top of regular income tax.4Internal Revenue Service. Entities 1
At year-end, each member gets a Schedule K-1 reporting their share of income, deductions, and credits.5Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) You owe income tax on your full allocated share even if the business retained some of that money. The partnership itself does not pay income tax; it files Form 1065 as an information return, and the tax passes through to each member’s personal return.
Every member has a capital account that tracks their economic stake. Contributions and profit allocations increase it. Distributions and guaranteed payments decrease it. Withdrawing more than your capital balance can trigger tax complications and disputes with the other members, so keep those records tight.
One documentation trap: partners in a multi-member LLC should not receive a W-2 for distributions or guaranteed payments. Those belong on the K-1.6Internal Revenue Service. Paying Yourself Issuing the wrong form creates mismatched filings and audit risk.
Self-Employment Tax and Quarterly Estimates
Because no tax is withheld from draws or distributions, single-member owners and active members of multi-member LLCs owe self-employment tax directly. The rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.7Internal Revenue Service. Topic No. 554, Self-Employment Tax The Social Security portion applies only to earnings up to $184,500 in 2026; Medicare has no cap.8Social Security Administration. Contribution and Benefit Base Self-employment income above $200,000 ($250,000 for married filing jointly) picks up an additional 0.9% Medicare tax.
You calculate the tax on Schedule SE and can deduct half of what you pay as an adjustment to gross income.7Internal Revenue Service. Topic No. 554, Self-Employment Tax Setting aside roughly 25% to 30% of net profit as you earn it usually covers both income tax and self-employment tax.
If you expect to owe $1,000 or more in federal tax for the year, you must make quarterly estimated payments. The 2026 due dates:
- April 15, covering January through March
- June 15, covering April and May
- September 15, covering June through August
- January 15 of the following year, covering September through December
If a due date lands on a weekend or federal holiday, the deadline shifts to the next business day.9Internal Revenue Service. Estimated Tax – Individuals 2 Missing a deadline triggers an underpayment penalty on the shortfall.
To sidestep the penalty entirely, your total payments must equal at least the lesser of 90% of the current year’s tax or 100% of last year’s tax (110% if your prior-year AGI exceeded $150,000).10Internal Revenue Service. Estimated Tax Many owners pay based on the prior-year safe harbor because it stays penalty-free even when current income swings.
Paying Yourself a Salary Under an S-Corp Election
An LLC can elect to be taxed as an S corporation by filing Form 2553. After the election, any owner working in the business becomes an employee and must be paid a salary through payroll. The business withholds federal and state income tax and the employee share of Social Security and Medicare from each check.11Office of the Law Revision Counsel. 26 USC 3121 – Definitions The business also pays the employer share plus federal unemployment tax at a net 0.6% on the first $7,000 of wages.12Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
You issue yourself a W-2 at year-end.13Internal Revenue Service. About Form W-2, Wage and Tax Statement The business files quarterly payroll returns on Form 941, or a single annual Form 944 if total employment tax liability runs $1,000 or less.14Internal Revenue Service. Certain Taxpayers May File Their Employment Taxes Annually
The reason owners make this election: profits left in the business after reasonable salary is paid can be distributed as non-dividend distributions. Most S-Corp distributions escape self-employment tax, and distributions within your stock basis are generally not subject to income tax either.15Internal Revenue Service. S Corporation Stock and Debt Basis The salary-plus-distribution split can save meaningful payroll tax compared with default LLC treatment, where every dollar of net income runs through self-employment tax.
One warning about payroll taxes: if withheld amounts do not get deposited with the IRS, the trust fund recovery penalty makes any responsible person personally liable for 100% of the unpaid employee-share taxes.16Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty (TFRP) That penalty pierces the LLC’s liability shield.
What Reasonable Compensation Means
S-Corp owner-employees must receive “reasonable compensation” for their work before taking distributions. A salary set artificially low to duck payroll tax is a top audit trigger. If the IRS finds the salary unreasonable, it can reclassify distributions as wages and assess back employment taxes on the reclassified amount.17Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
The IRS looks at whether the business earns money primarily from the owner’s personal services (which pushes toward more salary) versus employees, equipment, or capital. It weighs your training and experience, hours and duties, comparable market pay for similar roles, whether any salary has been paid at all before distributions, and any documented compensation agreements. The defensible approach is to benchmark against Bureau of Labor Statistics wage data for your role and geography, then keep the documentation showing how you arrived at the number.
C-Corp Election: Salary Plus Dividends
An LLC can also elect C-Corp treatment by filing Form 8832. The business pays corporate income tax on its profits, and when those after-tax profits get distributed as dividends, the owner pays income tax again on the individual return.18Internal Revenue Service. Forming a Corporation That double taxation is the main reason C-Corp elections are uncommon for small owner-operated LLCs.
C-Corp owner-employees still run payroll and receive a W-2. Dividends go on Form 1099-DIV and may qualify for lower rates as qualified dividends.19Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions Even with the qualified-dividend rate, the combined corporate and individual bill often exceeds what pass-through or S-Corp treatment would produce.
Deductions That Reduce the Tax on Your Pay
Several deductions cut the tax hit on the money you take out.
If your LLC is taxed as a sole proprietorship or partnership, you deduct 50% of self-employment tax as an above-the-line adjustment, lowering your AGI.7Internal Revenue Service. Topic No. 554, Self-Employment Tax
Owners who aren’t eligible for a spouse’s employer plan can deduct 100% of health, dental, and vision premiums for themselves, a spouse, and dependents. The plan must be established under the business, and you must have net profit for the year. You use Form 7206 and report the deduction on Schedule 1.20Internal Revenue Service. Instructions for Form 7206
Retirement plans move a lot of money off the tax bill. A SEP IRA allows contributions up to 25% of net self-employment income, capped at $69,000 for 2026.21Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs) A Solo 401(k) pairs an employee deferral of up to $24,500 with an employer contribution of up to 25% of compensation, capped at a combined $72,000 for 2026, with catch-ups available at 50 and older.22Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026
A boundary to know: the Section 199A qualified business income deduction, which let many LLC owners deduct up to 20% of qualified business income, expired December 31, 2025. It is not available for the 2026 tax year unless Congress extends it.23Internal Revenue Service. Qualified Business Income Deduction Its loss raises the effective rate on pass-through income for 2026 and increases the value of the S-Corp election and retirement contributions.
Documenting What You Pay Yourself
Sloppy records around draws and distributions put your liability shield at risk. If a court finds you treated the business account as personal spending money by paying for groceries or personal meals directly, it can pierce the veil and hold you personally liable for business debts. The fix is simple discipline: transfer a documented draw to your personal account first, then spend from personal funds.
In a multi-member LLC, each member’s capital account should reflect every contribution, allocation, distribution, and guaranteed payment. Gaps between the operating agreement and what actually happened invite disputes among members and IRS scrutiny. Log each payment with a date, amount, and purpose in the accounting system, and reserve W-2s for owner-employees of LLCs taxed as S corporations or C corporations.6Internal Revenue Service. Paying Yourself