How do I pay myself from my LLC? Your essential guide to the process

To pay yourself from your LLC, you typically use one of two methods: an owner’s draw or a salary, depending on your LLC’s structure. Single-member LLCs usually pay through owner’s draws, while multi-member LLCs use partner distributions. If your LLC is taxed as an S Corp or C Corp, you must pay yourself a salary with proper tax withholdings. Each method has unique tax implications, and understanding your LLC’s classification is key.

Key takeaways

• The two main methods for paying yourself from an LLC are the owner’s draw and salary.
• The ownership structure of your LLC determines your payment options.
• Different LLC structures and payments come with different tax obligations.
• LLCs may be taxed as sole proprietorships, partnerships, or corporations.
• Maintaining a clear paper trail is essential when paying yourself from an LLC.

Table of contents

• Introduction to LLC payment methods
• Methods of paying yourself from an LLC
• How LLC ownership structure determines payment method 
• Tax implications of LLC payment methods
• Benefits of paying a salary from an LLC
• Best practices for paying yourself from an LLC
• How FreshBooks makes LLC payments easy

We’ll explore the main payment options for LLC owners, as well as how LLC ownership structure influences what payment methods you can use.

We’ll also take a look at how LLC structure and payments influence your tax obligations for single-member and multi-member LLCs. Finally, we’ll examine some of the benefits of paying yourself from your LLC and best practices for keeping your payments efficient and compliant. 

Introduction to LLC Payment Methods

As a limited liability company owner, there are several different methods for paying yourself. These methods vary depending on the structure of your LLC, which is influenced by the number of LLC members in your company. Each LLC structure offers different payment options and comes with varying obligations for when you pay taxes. It’s essential to understand these structures to benefit from liability protection so you remain compliant with IRS requirements for LLCs and find the payment method that’s best for you.

Methods of paying yourself from an LLC

The two primary methods for paying yourself from an LLC are by owner’s draw and by salary. 

Owner’s draw

An owner’s draw is when a business owner withdraws money from the company to use for personal reasons. This is a common way for small business owners to pay themselves from their business. 

Partner distributions

A partner distribution occurs when your LLC has more than one owner, or, in this case, partner. It works similarly to the Owner Draw.

Salary

Paying yourself a salary from your LLC is just like paying an employee — you’ll pay yourself a designated amount and withhold income tax and payroll tax.

In addition to your salary, you may also be eligible to pay yourself dividends from your corporate profits. The amount you’re allowed to receive in dividends is outlined in your company’s articles of incorporation.

Whether you can use owner’s draw or salary will depend on how you report your income taxes to the IRS. 

How LLC ownership structure determines payment method

Unlike a sole proprietorship or a corporation, LLCs may be treated as different types of pass-through entities depending on how many members are in your LLC. This determines how you can get paid and how your business will be taxed.

Paying yourself from a single-member LLC

A single-member LLC operates much like a sole proprietorship for the purposes of payment and taxation. The key advantage to an LLC over a sole proprietorship is that it offers greater protection from liability for your personal assets if your business profits should face financial or legal challenges.

Business owners of a single-member LLC must pay themselves through an owner’s draw. To perform an owner’s draw, there are two basic steps:

Step 1: Write a check from your business account to your personal account, then deposit this check.

Step 2: Record the financial transaction in your company’s financial records. It should be labelled as an owner’s draw, making it a debit from your owner’s equity account.

Paying yourself from a multi-member LLC

When you run a multi-member LLC, the IRS treats your business as a partnership by default. In a partnership, you can choose to pay yourself through the partners’ distribution.

However, multi-member LLCs can also choose to be treated as a corporation rather than a partnership. When you operate an S Corporation or a C Corporation, you’re not eligible to be paid through a partner’s distribution. LLC members must be hired as employees of the business and paid a salary.

Tax implications of LLC payment methods

Whether your LLC is a single-member business, a multi-member business set up as a partnership, or a multi-member business set up as a corporation will determine your tax obligations and how you file your personal tax return.

Owner’s draws for a single-member LLC

When you’re an LLC business owner of a single-member LLC, your business profits and your personal income are considered the same for taxation purposes. You’ll report your income on Schedule C of your personal income taxes using IRS Form 1040. Note that you’ll pay income taxes on your entire LLC profits, not just the amount that you take through an owner’s draw.

As well as paying your federal, state, and local income taxes on your business earnings, you’ll need to pay self-employment tax on the amount that you withdrew as an owner’s draw. This is taxed at a rate of 15.3% for Social Security and Medicare payments.

Owner’s draws for a multi-member LLC

A partnership LLC is a pass-through entity, meaning that the partnership itself isn’t taxed — instead, it’s the responsibility of the members to pay the income tax on the business’s earnings. Each member pays a portion, the size of which is dictated by the partnership agreement.

Partners receive a Schedule K-1 form from the business, which tells them their share of the company’s income. One important thing to note is that partners in an LLC are taxed on their entire portion of the company’s earnings, not just the amount they withdraw as a partners’ distribution. So even if you only withdraw 10% of the business’s earnings, if your portion is 25%, then you’ll pay income tax on that full 25%.

Unlike corporations, partnerships aren’t double-taxed, so you won’t pay an additional tax on the money you withdrew. However, as with a sole proprietorship, you must still pay a self-employment tax of 15.3%. This is taxed only on the amount you took as an owner’s draw, not on your portion of total business earnings.

Salaries for a single- or multi-member LLC

To pay a salary, the single or multi-member LLC needs to first be treated as a corporation. It can be an S Corporation or a C Corporation. As with any salary, your income tax and payroll taxes are withheld from your paycheck. Depending on your corporate structure, there might also be double taxation for the C Corp.

If you pay yourself dividends, you’ll also pay income tax on these. However, dividends are exempt from payroll tax. 

Benefits of paying a salary from an LLC

If your business is an LLC structured as a Corporation, the IRS expects you to pay yourself reasonable compensation. There are also multiple benefits to paying yourself from your LLC, including potential tax savings :

• Access to additional business tax deductions to reduce your total taxable income.
• Separation of business and personal finances.
• Reduced liability risk from business debts.
• Consistent and guaranteed payments.

Best practices for paying yourself from an LLC

The following best practices can help streamline your payment method and keep your business compliant with IRS rules and regulations:

Understand your business structure

Whether your LLC operates as a sole proprietorship, a partnership, or a corporation will determine how you’re taxed and how you can pay yourself. The IRS requires that your payments align with your taxable structure, so if you’re not sure what the best approach is, it’s a good idea to consult with a tax professional. Don’t pay your rent from the business checking and call it owner’s draw.

Maintain clear records

The IRS requires that you maintain clear documentation of all owners’ draws, salaries, and other payments from your business bank account. Any time you pay yourself from your LLC, record it on your company’s financial records and your personal records, so you leave a clear paper trail.

Check your tax filing obligations

As an LLC owner, make sure you understand all your tax obligations, particularly if you’re being taxed as a corporation. You’ll likely have to file a business tax return in addition to your personal income tax return, since you’ll need to pay both personal and business taxes.

How FreshBooks makes LLC payments easy

Paying yourself from your LLC is an essential part of running a small business. Depending on how many members are in your LLC and how you choose to structure your company, you may opt to pay yourself through owner’s draws or pay yourself a salary and dividends. Your business structure and payment methods will also influence how your business is taxed. 

When you’re managing multiple payment methods, keeping clear records is essential. FreshBooks offers an efficient and straightforward system for tracking your business finances. Expense and income tracking tools help you monitor incoming and outgoing payments, simplifying record-keeping for tax season. Clear profit reporting helps you determine the best amount to take as an owner’s draw, while bank integrations make payments easy. Try FreshBooks free to discover how the right accounting software makes LLC payments a breeze.

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