Daperis CPAHow Do I Pay Myself From My LLC? Draw vs. Salary
By default, LLC owners don't get a paycheck. You take an owner's draw, a transfer from the business account to your personal account, and you pay tax on the business's profit whether you draw it out or leave it in the account. That changes only if the LLC has elected to be taxed as an S-Corp, in which case part of what you take out has to run through actual payroll.
The Default: Owner's Draw
Single-member LLC. The IRS treats you and the business as the same taxpayer by default. You write yourself a transfer whenever you want, there's no payroll involved, and you owe income tax plus self-employment tax on the LLC's net profit, whether or not you actually pulled the cash out.
Multi-member LLC. Same idea, split between partners. Members take draws (or "guaranteed payments" for specific services rendered), and each partner is taxed on their share of the LLC's profit as reported on their K-1, again regardless of what they actually withdrew.
No automatic withholding. Because a draw isn't a paycheck, nobody is withholding income tax or self-employment tax for you. That's exactly why quarterly estimated payments exist, and why owners who skip them get an unpleasant surprise in April.
When Payroll Enters the Picture
The S-Corp election changes the mechanics
If your LLC elects S-Corp tax treatment, the IRS requires that you pay yourself a "reasonable salary" through actual payroll, W-2, tax withholding, the whole system, for any work you do for the business. Anything left over after that salary can come out as a distribution, which isn't subject to Social Security or Medicare tax. That's the entire appeal of the S-Corp election: it can lower your self-employment tax bill.
"Reasonable" is doing a lot of work in that sentence
The IRS doesn't let you pay yourself $1 in salary and take $200,000 in distributions to dodge payroll tax. Reasonable compensation gets judged against what someone doing your job, at your level of experience, in your industry and location, would actually be paid. Set it too low and you're building an audit risk, not a tax strategy.
This decision isn't just federal
Electing S-Corp status changes more than your federal self-employment tax. Depending on where your business operates, it can also change which state and local entity-level taxes apply. Changing your tax election is a decision that has a lot of moving parts, and all of them should be considered before you flip the switch, not after.
Keep It Simple / Key Takeaway 🍕
Your entity's tax structure is critical when determining how you pay yourself. Draws are simple and flexible but come with zero automatic withholding, so you have to plan for taxes yourself. Payroll through an S-Corp election adds complexity and cost, but it can lower your overall tax bill if your profit level supports it.
See how this played out for a tradesperson going out on his own, from entity setup to actually paying himself correctly.
Disclaimer: This article is for educational and informational purposes only and is not intended as financial, investment, legal, or tax advice. The author assumes no liability whatsoever in connection with its use. This content is not an exhaustive explanation of any topic, practice or process. You should always seek the advice of a licensed professional before making any accounting, tax, financial, investment or legal decision.
FAQ
How much should I pay myself from my LLC?
There's no set formula. On a draw, you can take out as much or as little as the business supports, since the draw itself isn't a separate taxable event, only the underlying profit is. Once you've elected S-Corp status, the salary portion has to be "reasonable" for your role, industry, and location. There's no dollar figure that satisfies the IRS across the board; it gets judged case by case.
Do I need payroll for a single-member LLC?
Not by default. A single-member LLC is taxed as a sole proprietorship unless you've filed an S-Corp election, so you take draws and there's no payroll to run. Payroll only enters the picture once you've elected S-Corp treatment or hired employees.
Single-member LLC vs. S-Corp — how does paying myself change?
On a default single-member LLC, everything comes out as a draw and you owe self-employment tax on the full profit. Elect S-Corp treatment and part of what you take out has to run through payroll as reasonable salary, with the rest coming out as a distribution that isn't subject to self-employment tax. That split is the entire reason people consider the election, but it only pays off once profit is high enough to justify the added payroll cost.