How to Pay Yourself in a Multi-Member LLC: Draws and Taxes

To pay yourself in a multi-member LLC, you use one of three methods: an owner draw, a guaranteed payment, or — if the LLC has elected S-corporation tax status — a W-2 salary paired with distributions. By default, the IRS treats a multi-member LLC as a partnership, meaning the business itself pays no income tax and profits pass through to each member’s personal return based on ownership share.1Internal Revenue Service. LLC Filing as a Corporation or Partnership Which method fits your situation depends on how the LLC is classified for tax purposes and what role you play in the business.

The Operating Agreement Comes First

Before any money moves, read your operating agreement. It sets each member’s ownership percentage, how profits are split, when distributions can happen, and any limits on withdrawals. Without a written agreement, state default rules apply, and those defaults rarely match what the members actually intended.

Confirm the LLC’s federal tax classification while you are at it. Most multi-member LLCs default to partnership taxation, but some file Form 8832 for corporate treatment or Form 2553 for S-corporation status.2Internal Revenue Service. Entities 3 The classification decides which payment methods are on the table.

Owner Draws

An owner draw is the simplest way to pay yourself from a partnership-taxed LLC. You move money from the business account to your personal account. Nothing is withheld — not income tax, not Social Security, not Medicare.3Internal Revenue Service. Paying Yourself You are withdrawing your share of accumulated profits or contributed capital, not earning wages.

Each draw reduces your capital account, the internal ledger that tracks your equity. Timing and size usually follow the operating agreement, which may set a monthly or quarterly schedule, require proportional draws across members, or allow flexibility by mutual agreement. Because nothing comes out for taxes at the time of payment, you carry the burden of setting cash aside for what you will owe.

Watch Your Basis

Every member has a tax basis in the LLC — a running total of contributions, allocated income, and prior withdrawals. As long as a cash draw stays at or below your adjusted basis, you owe no tax on the distribution itself, because the income that generated the cash was already taxed when it was allocated to you. Draw more than your basis and the excess is treated as a capital gain.4Office of the Law Revision Counsel. 26 USC 731 – Extent of Recognition of Gain or Loss on Distribution Your share of LLC debt can increase basis, so tracking it carefully matters.

Guaranteed Payments

A guaranteed payment compensates a member for services performed or capital provided, whether or not the LLC turns a profit. Federal tax law treats it much like a salary for the calculation of both the LLC’s income and the member’s gross income: the LLC deducts it as a business expense, and the member reports it as ordinary income.5Office of the Law Revision Counsel. 26 USC 707 – Transactions Between Partner and Partnership

Members agree on the amount and schedule, and the arrangement should live in the operating agreement or a separate resolution. The figure is often benchmarked against what a non-owner would earn for similar work. Unlike a draw, a guaranteed payment is owed even in a losing year, and the books must record it as a guaranteed payment rather than a profit distribution.

Guaranteed payments are subject to self-employment tax, just like a member’s share of partnership income.6Office of the Law Revision Counsel. 26 USC 1402 – Definitions They appear on the member’s Schedule K-1 and flow to the personal return.

Self-Employment Tax

In a partnership-taxed LLC, both your share of net income and any guaranteed payments you receive are subject to self-employment tax. The rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.7Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The Social Security portion applies only to net earnings up to the annual wage base, which is $184,500 for 2026.8Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet The Medicare portion has no cap.

If self-employment income exceeds $200,000, or $250,000 for married filing jointly, an additional 0.9% Medicare tax applies to the amount above the threshold.9Internal Revenue Service. Topic No. 560, Additional Medicare Tax

You can deduct half of your self-employment tax, the employer-equivalent portion, when calculating adjusted gross income. That deduction reduces income tax but does not reduce the self-employment tax itself.7Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)

Quarterly Estimated Payments

Because nothing is withheld from draws or guaranteed payments, you pay federal income tax and self-employment tax in quarterly installments on Form 1040-ES. For 2026, the deadlines are:

  • April 15, 2026, for income earned January 1 through March 31
  • June 15, 2026, for income earned April 1 through May 31
  • September 15, 2026, for income earned June 1 through August 31
  • January 15, 2027, for income earned September 1 through December 31

If a due date lands on a weekend or legal holiday, the deadline moves to the next business day.10Internal Revenue Service. Estimated Tax

You avoid an underpayment penalty by paying at least 90% of the tax you will owe for 2026 or 100% of the tax shown on your 2025 return, whichever is smaller. If your 2025 adjusted gross income exceeded $150,000, or $75,000 if married filing separately, that safe harbor rises to 110% of your prior-year tax.11Internal Revenue Service. Form 1040-ES, Estimated Tax for Individuals Payments can be made through IRS Direct Pay, EFTPS, or other methods listed on the IRS website.

Paying Yourself a Salary Under an S-Corp Election

If the LLC files Form 2553 electing S-corporation status, members who work in the business become employees for payroll purposes.12Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers The LLC runs payroll, withholds federal income tax, and pays the employee and employer shares of Social Security and Medicare. Each working member receives a W-2 at year-end alongside a Schedule K-1.

The appeal is that only salary is subject to employment taxes. Any remaining profit distributed to members after salaries are paid passes through free of self-employment tax. For a profitable LLC that can be significant, but it comes with employer obligations. The LLC pays:

An S-corporation election also means filing Form 1120-S each year and meeting stricter record-keeping standards. Many LLCs bring in a payroll service or accountant to handle it.

Reasonable Compensation

Under an S-corporation election, the IRS requires that every working member receive a salary that qualifies as “reasonable compensation” before the LLC makes any non-wage distributions.14Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues A token salary paired with large tax-free distributions is exactly what the IRS looks for.

When evaluating whether a salary is reasonable, the IRS weighs:

  • Your training and experience
  • Your duties and responsibilities in the business
  • The time and effort you devote to the LLC
  • What comparable businesses pay for the same work
  • Whether revenue comes primarily from your personal services, other employees, or the company’s capital and equipment

If the IRS finds a salary unreasonably low, it can reclassify distributions as wages, and courts have consistently upheld that approach.12Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers Reclassification brings back employment taxes, failure-to-withhold and failure-to-deposit penalties, and interest, and those costs can outrun the tax savings the low salary was meant to produce.

Health Insurance and Retirement Contributions

Two payment items sit alongside draws and salary and change how the numbers work.

Health Insurance Premiums

When a partnership-taxed LLC pays a member’s health insurance premiums, the payment is treated as a guaranteed payment. The LLC deducts the cost, and the member reports it as income on Schedule K-1. The member can then generally deduct 100% of the premium on their personal return as the self-employed health insurance deduction, effectively offsetting the income, and the deduction is claimed on the front page of Form 1040 without itemizing.

If the LLC has elected S-corporation status, premiums paid on behalf of a member who owns more than 2% of the company must be included in that member’s W-2 wages. The member can still claim the self-employed health insurance deduction on the personal return.

Retirement Contributions

A SEP IRA is a common choice for partnerships because it is easy to set up and administer. For 2026, the maximum contribution is the lesser of 25% of net self-employment earnings or $72,000.15Internal Revenue Service. Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits All contributions come from the LLC, with no separate employee deferrals.

With an S-corporation election, a 401(k) plan opens up. Employee elective deferrals can reach $24,500 in 2026, with employer profit-sharing contributions on top. Members age 50 and older can add $8,000 in catch-up contributions.15Internal Revenue Service. Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits Total annual additions across employee and employer contributions cannot exceed $72,000 before catch-up amounts.

Year-End Reporting

A multi-member LLC taxed as a partnership files Form 1065, which reports the LLC’s total income and expenses and calculates each member’s share of profits, losses, and other items.16Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income The LLC itself pays no tax on the return; it is informational.

Each member then receives a Schedule K-1 showing their allocated share of income, deductions, credits, and any guaranteed payments.17Internal Revenue Service. Instructions for Form 1065 – U.S. Return of Partnership Income For calendar-year LLCs, Form 1065 and the K-1s are due March 15 of the following year.18Internal Revenue Service. Publication 509 (2026), Tax Calendars Members report their K-1 amounts on Schedule E of their Form 1040.

An LLC with an S-corporation election files Form 1120-S instead of Form 1065, and member-employees also receive a W-2 for their salary. Accurate and timely reporting in either structure keeps penalties and interest off the table.