If you're wondering how to pay yourself from an LLC, you probably have a few questions.
Can you simply transfer money from your business bank account to your personal account? Should you put yourself on payroll? And how much can you pay yourself without creating unnecessary tax problems?
The answer depends on how your LLC is taxed.
An LLC is a legal business structure, but it doesn't automatically determine your federal tax treatment.
Depending on how your business is set up and whether you've made certain tax elections, you may need to pay yourself through owner's draws, payroll, or a combination of salary and distributions.
In this guide, we'll walk through how to pay yourself from an LLC, what happens when you take money out of your business, and how different tax classifications affect your options. We'll also look at when electing S corp taxation might make sense.
You can also watch the full video breakdown here:
Table of Contents
- How Does Your LLC's Tax Classification Affect How You Pay Yourself?
- How Do You Pay Yourself From a Single-Member or Multi-Member LLC?
- How Much Should You Pay Yourself From Your LLC?
- Should You Put Yourself on Payroll as an LLC Owner?
- What Are the Advantages and Disadvantages of S Corporation Taxation?
- How Should You Pay Yourself From Your LLC?
- FAQs
- About the Author
How Does Your LLC's Tax Classification Affect How You Pay Yourself?
Before deciding whether to pay yourself through an owner's draw or payroll, you need to understand how your LLC is taxed.
Why Does the Way Your LLC Is Taxed Matter When Paying Yourself?
Here's where many business owners get confused: An LLC is a legal business structure, not a federal tax classification.
When you form an LLC, you're establishing a legal entity under state law. But for federal income tax purposes, the IRS looks at how many owners your LLC has and whether you've elected a different tax treatment.
This matters because the way your LLC is taxed determines whether you take money out through owner's draws, payroll, or other types of distributions. And choosing the wrong method can create accounting and tax reporting problems.
To understand which method applies to you, let's first look at how the IRS treats LLCs when no corporate tax election has been made.
How Are Single-Member and Multi-Member LLCs Taxed by Default?
By default, the IRS classifies LLCs based on the number of owners. The cheat sheet below shows how an LLC's legal structure connects to its federal tax classification.
Look at the LLC category on the left. A single-member LLC generally falls under the self-employed tax category, while a multi-member LLC generally follows partnership taxation.
- Single-member LLC: If you're the only owner, the IRS generally treats your LLC as a disregarded entity for federal income tax purposes. This means the business's income and expenses are typically reported on your personal tax return, much like a sole proprietorship.
- Multi-member LLC: If your LLC has two or more owners, the IRS generally treats it as a partnership for federal income tax purposes. The partnership typically files its own informational tax return, while each partner reports their share of the business's income on their individual return.
In both situations, owners generally don't pay themselves W-2 wages for services performed as owners. Instead, money can be taken out through owner's draws or partner distributions, depending on the business structure and agreements.
But these default classifications aren't your only options.
What Changes When an LLC Elects S Corp or C Corp Tax Treatment?
An LLC can also elect to be taxed as an S corporation or C corporation, provided it meets the applicable requirements.
The business remains an LLC under state law, but its federal tax treatment changes, including how owners who work in the business are compensated.
An LLC owner under default tax treatment takes money out of the business and tracks totals through owner's draws NOT W-2 payroll.
Once an LLC elects C corporation or S corporation taxation, an owner who works in the business needs to pay themselves as a W-2 employee.
Plus, the amount you pay yourself in an S corp must be considered “reasonable” and is called “Reasonable Compensation.”
This amount being “reasonable” is more critical in the S corporation than a C corporation because there is the potential to save on payroll or self-employment taxes in an S corporation (and there isn’t in a C corporation).
The tax savings can occur in the S corporation because nonwage distributions have no self-employment taxes. However, distributions can only be taken out after reasonable compensation is paid.
With C corp taxation, an owner who is also an employee must receive wages through payroll, while they can receive dividends on their stock also.
Dividends are double taxes:
- At the 21% corporate level, AND
- As dividend (investment income)
Same LLC. Different tax treatment. Different rules for paying yourself.
Once you understand how your LLC is taxed, the next question is how to actually move money from your business to yourself. Let's start with LLCs that follow their default tax classifications.
How Do You Pay Yourself From a Single-Member or Multi-Member LLC?
Now that you understand the different tax classifications, let's look at how to pay yourself from an LLC that follows its default tax treatment.
Under default LLC tax treatment, owners take money out through owner's draws or partner distributions rather than paying themselves W-2 wages.
How Do Owner's Draws Work for LLC Owners?
An owner's draw is money you take out of your business for personal use. This could be a transfer from your business checking account to your personal bank account or a withdrawal to cover personal expenses.
For example, you can transfer money directly from your LLC's business bank account to your personal account or withdraw cash for personal use.
The money you take out is recorded as an owner's draw, not a business expense.
Why does that matter?
Because an owner's draw doesn't reduce your business's taxable profit. You're simply taking money out of the business for personal use.
For multi-member LLCs taxed as partnerships, owners generally receive partner distributions instead. Partnerships may also make guaranteed payments to partners, which follow different tax rules.
The important distinction is that withdrawing money from your business is not the same as earning a salary or paying a deductible business expense.
Can You Pay Yourself Using a W-2 or 1099?
When deciding how to pay yourself from an LLC, you might wonder whether to use W-2 payroll or issue yourself a 1099.
For LLCs following their default tax classifications, here's the general rule:
| LLC Tax Treatment | W-2 Payroll for the Owner? | 1099 for the Owner's Services? | Typical Owner Payment |
|---|---|---|---|
| Single-member LLC (default) | Generally no | Generally no | Owner's draw |
| Multi-member LLC (partnership) | Generally no for partners | Generally no for partners | Partner distributions; possible guaranteed payments |
For a single-member LLC taxed as a disregarded entity, you generally aren't treated as an employee of your own business for federal income tax purposes.
Similarly, partners in an LLC taxed as a partnership generally aren't employees of the partnership for the services they perform as partners.
You don't need to create a payroll expense just to take money out of your business.
That changes when an LLC elects corporate tax treatment, which we'll cover later.
How Should You Record Owner's Draws and Contributions?
Once you start transferring money between your business and personal accounts, you need to make sure those transactions are recorded correctly.
There are two important types of owner transactions to track:
- Owner's draw: Money you withdraw from the business for personal use.
- Owner's contribution: Money or other assets you personally put into the business.
Here's how you would record these transactions:
| Transaction | How to Record It |
|---|---|
| Transfer money from your LLC's business account to your personal account | Owner's Draw (Equity) |
| Deposit personal funds into your LLC's business account | Owner's Contribution (Equity) |
Both transactions affect owner's equity rather than business revenue or operating expenses.
This is important because recording an owner's draw as an expense could make your business appear less profitable than it actually is.
Likewise, recording an owner's contribution as revenue could make it appear that your business earned money when you simply invested your own funds.
Your business's profit and the money you personally withdraw are two different things.
Keeping your owner's draws and contributions in separate accounts helps you maintain accurate records and better understand where your business money is going.
Now that you know how to take money out and record it, there's another question to consider: How much should you actually pay yourself, and does that amount affect your taxes?
How Much Should You Pay Yourself From Your LLC?
As you learn how to pay yourself from an LLC, you may wonder whether the amount you withdraw affects how much you owe in taxes.
Should you withdraw all your earnings, take only a portion, or leave the money in your business?
For a single-member LLC or multi-member LLC under default tax treatment, the amount you withdraw generally doesn't change your taxable business income.
Here's why.
Does Withdrawing Money From Your LLC Affect Your Taxable Profit?
When your LLC is taxed as a sole proprietorship or partnership, the business follows pass-through taxation. This means the business's income passes through to its owner or owners for tax purposes.
Your accounting records track the business's income and expenses to determine its net income:
Business Income − Business Expenses = Net Income
That net income is generally what you're taxed on, regardless of how much money you actually withdraw from the business.
For a single-member LLC, the business's net income generally passes through to your personal tax return.
For a multi-member LLC taxed as a partnership, each partner is taxed on their share of the business's income. For example, if you're allocated 50% of the partnership's net income, that share is generally what you report for tax purposes.
Your taxable business income isn't determined by how much you pay yourself.
Why Can You Owe Taxes Even When You Leave Money in Your LLC?
Some business owners leave money in their business accounts because they think they can avoid paying taxes by not withdrawing it.
But under default LLC taxation, leaving money in the business doesn't mean you avoid taxes on the profits.
Here's how the two situations compare:
| What You Do With Your Business Profits | What Happens for Tax Purposes |
|---|---|
| Withdraw money for personal use | You're generally taxed on business net income, not the amount withdrawn. |
| Leave the money in your LLC | You're still generally taxed on business net income, even without withdrawing it. |
Whether you take the money out or leave it in your business, the taxable income generally remains the same.
Moving money out of your LLC doesn't determine your taxes. Your business's taxable income does.
How Does Ownership Basis Affect the Tax Treatment of Withdrawals?
Another important part of understanding how to pay yourself from an LLC is knowing how your basis in the business affects withdrawals.
Basis is a tax calculation that helps track:
- Money you've contributed to the business.
- Business income you've already paid taxes on over time.
LLC Owner Basis Calculation
Starting Year Balance + Contributions + Business Net Income − Draws = Ending Year Balance
This simplified calculation shows how your starting balance, contributions, business net income, and withdrawals affect your ending balance.
Depending on how your LLC is taxed, additional adjustments may be needed to determine your actual tax basis.
Why does this matter?
Keeping track of your basis helps determine whether you can withdraw money from your business without creating additional taxes. Taking out more than your available basis may result in additional taxes.
For a single-member LLC taxed as a sole proprietorship, this is generally more straightforward. However, you should still keep track of your basis.
For a multi-member LLC taxed as a partnership, there are additional rules to consider, including following your agreements with other members and the applicable tax requirements.
Paying yourself from a default-taxed LLC is generally flexible, but you still need to keep track of your basis and follow the applicable rules.
Now, what happens if your LLC elects to be taxed as an S corporation or C corporation?
That's where the rules for paying yourself start to change.
Should You Put Yourself on Payroll as an LLC Owner?
The rules for how to pay yourself from an LLC change when your business elects corporate tax treatment.
Whether you have a single-member or multi-member LLC, you can elect to be taxed as an S corporation or C corporation.
While C corp taxation may be useful for certain advanced strategies, S corp taxation offers a potential opportunity to save on taxes through how you pay yourself.
But that opportunity comes with different rules.
When Does an LLC Owner Need to Receive W-2 Wages?
If your LLC elects to be taxed as an S corporation, you must pay yourself through W-2 payroll when you work in the business.
Unlike taking money out through an owner's draw under default LLC taxation, you're now paying yourself as an employee of your business.
And there's an important requirement: Your salary must be reasonable.
The IRS has rules around reasonable compensation, meaning you can't simply choose an artificially low salary to reduce your payroll taxes.
This makes the amount you pay yourself especially important. Under default LLC taxation, your withdrawals generally don't determine your taxable business income.
But with S corp taxation, the salary you pay yourself becomes part of how you manage your business's taxes.
So, why would an LLC owner choose a tax classification that requires payroll?
How Do Salary and Distributions Work for an LLC Taxed as an S Corp?
Your W-2 salary and nonwage distributions are treated differently for tax purposes. Here's how the two differ:
| Type | How It Works |
|---|---|
| W-2 salary | Compensation paid to you through payroll, subject to applicable payroll taxes. |
| Nonwage distributions | Payments to S-corp shareholders outside payroll that generally aren't subject to employment taxes. |
However, that doesn't mean you can simply pay yourself a small salary and treat the rest of your earnings differently to avoid payroll taxes.
Your compensation still needs to meet the IRS's reasonable compensation requirements.
And even when there's an opportunity to save taxes, electing S corp status isn't automatically the best decision.
There are additional payroll responsibilities, tax filing requirements, and other considerations that can make operating an S corporation more complicated.
So, before making the election, there's one more question worth asking: Will the potential tax savings actually outweigh the additional requirements?
What Are the Advantages and Disadvantages of S Corporation Taxation?
S corp taxation offers potential tax savings, but it also comes with additional responsibilities. Before making the election, it's important to consider both the advantages and disadvantages.
Does an S Corp Save on Taxes?
Not every LLC will save money by electing S corp status. The potential savings depend on your business income, reasonable compensation, and the additional requirements that come with the election.
Another important consideration is the 20% pass-through deduction. This deduction can affect the overall tax savings comparison, which is one reason S corp taxation may not save as much as some business owners expect.
Rather than assuming S corp status will save you money, it's important to compare the potential savings with the additional responsibilities and costs that come with the election.
What Is Reasonable Compensation for an S Corp Owner?
When evaluating whether S corp taxation could save you money, you need to consider the reasonable salary you're required to pay yourself.
The IRS has rules around reasonable compensation, so you can't simply choose a low salary to maximize potential tax savings.
This is an important part of determining whether an S corp election actually makes financial sense for your business.
Want to Learn How Reasonable Compensation Is Calculated?
If you're wondering how to determine a reasonable salary for yourself as an S corp owner, I cover this topic in more detail in my video:
How Can You Calculate Your S Corp Reasonable Compensation?
You can use my Reasonable Compensation Calculator to help you work through the numbers and explore what a reasonable salary might look like for you as an S corp owner.
Get the Reasonable Compensation Calculator Here!
What Additional Payroll and Tax Filing Costs Should You Consider?
One of the biggest differences between default LLC taxation and S corp taxation is the additional work involved in managing your business.
Once you elect S corp status, there are several requirements to consider:
| Requirement | What Changes Under S Corp Taxation |
|---|---|
| Payroll | You need to pay yourself through W-2 payroll when you work in the business. |
| Accountable Reimbursement Plan | Business expenses you pay personally need to be properly tracked and reimbursed through an accountable plan. |
| Business Tax Return | The business generally files a separate federal tax return using Form 1120-S. |
| Moving Money and Assets | S corps have more restrictions than partnerships when transferring money and assets in and out of the business. |
The accountable reimbursement plan is especially important to understand.
When you're operating as an S corp owner-employee, expenses such as business use of your personal vehicle, home office expenses, or certain business travel costs need to be handled differently.
Instead of simply treating these as self-employed business deductions, you generally need to track the expenses and reimburse yourself through an accountable reimbursement plan.
Without properly handling these reimbursements, you may miss out on business deductions that would otherwise be available.
There's also the separate business tax return. An S corporation generally files Form 1120-S, which adds complexity compared with filing as a self-employed business owner.
If your LLC is already taxed as a partnership, you're already filing a separate business tax return, so that part may not add as much complexity.
However, payroll and the additional S corp requirements still create more work.
S corp taxation may save money, but it also makes your accounting and tax responsibilities more complicated.
That's why the decision shouldn't be based on potential employment-tax savings alone. In some situations, electing S corporation status makes sense. In others, the added requirements may outweigh the benefits.
Could Electing S Corp Status Actually Save You Money?
When deciding how to pay yourself from an LLC, you also need to consider whether S-corp taxation makes financial sense. Compare the potential tax savings with the additional costs and requirements.
Access the Business Types Tax Comparison Calculator Here!
Before deciding how to pay yourself, it's important to understand which rules apply to your LLC and how those decisions can affect your business finances.
How Should You Pay Yourself From Your LLC?
Understanding how to pay yourself from an LLC starts with knowing how your business is taxed.
Whether you're taking owner's draws, receiving partner distributions, or paying yourself through W-2 payroll, understanding the rules helps you avoid unnecessary accounting and tax mistakes.
The important thing is to keep your business finances organized, track your payments correctly, and understand the tax implications before moving money out of your business.
If you're considering S corp taxation, remember that potential tax savings are only part of the picture. You also need to understand the additional requirements before deciding whether it's the right choice for your business.
Ready to Get Your LLC Accounting and Taxes Organized?
If you're looking for a place to start, get my free Business Spreadsheet Template to help you organize your business income and expenses and get a clearer picture of your finances.
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You'll also learn how to better manage your accounting and make more informed financial decisions, so you can spend less time feeling overwhelmed by your numbers and more time focusing on your business.
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FAQs
Can I Pay Myself From My LLC Whenever I Want?
If your LLC is taxed as a sole proprietorship or partnership, you can generally withdraw money from the business through owner's draws or distributions.
However, if you have a multi-member LLC, you also need to follow your partnership agreement and any applicable rules for distributions.
If your LLC elects S-corp taxation, different requirements apply, including paying yourself a reasonable W-2 salary when you work in the business.
Is an Owner's Draw Considered a Business Expense?
No. An owner's draw is not a business expense. It's money you take out of your business for personal use.
Instead of recording the withdrawal as an expense on your income statement, you record it in an owner's equity account.
This keeps your personal withdrawals separate from the expenses used to calculate your business's taxable profit.
Can I Pay Myself With a 1099 From My LLC?
If your LLC is taxed as a sole proprietorship or partnership, you generally cannot issue yourself a Form 1099 for the work you perform as an owner.
Instead, you take money out through the owner's draws or distributions. How you pay yourself changes if your LLC elects corporate tax treatment.
Do I Have to Pay Myself the Same Amount Every Month?
If your LLC is taxed as a sole proprietorship or partnership, you generally don't have to withdraw the same amount every month.
Your withdrawals can vary based on your business's available funds, although multi-member LLC owners must also consider their partnership agreements.
For an LLC taxed as an S corporation, owner-employees must follow the applicable payroll and reasonable compensation requirements.
Do I Have to Pay Taxes on Money I Withdraw From My LLC?
If your LLC is taxed as a sole proprietorship or partnership, withdrawing money generally doesn't create additional taxable income by itself.
Your business profits are generally taxable whether you withdraw the money or leave it in the business.
However, the tax treatment of withdrawals also depends on your ownership basis and, for multi-member LLCs, additional partnership rules.
About the Author
Hi there, 
Background in public accounting, teaching courses in higher education and specializing in small business coaching, services and education. I'm Amanda!
Your Instructor | The Business Finance Coach
I've spent my career in accounting, tax, finance, and education—from working at PwC and KPMG to teaching accounting and taxes at colleges and universities, and creating educational content for companies including Intuit TurboTax.
Throughout that experience, I kept seeing the same problem: small business owners were hugely underserved.
They were overwhelmed by complicated accounting software, confused by conflicting advice, and often left feeling like this was a hopeless area of their business that they would never understand.
I knew there had to be a simpler way.
So I took what I'd learned from accounting firms, education, and working with real businesses, and created The Business Finance Coach and The Master Your Accounting & Taxes Program.
My goal is to make business finances simple, practical, and understandable—so you can confidently manage your business, keep more of what you earn, and focus on building the business you actually want.
