How to pay yourself from an LLC

Does taking money out change your tax?

For an LLC taxed as a sole proprietorship or partnership, the owners are taxed on the profit, not on what they take out. Taking money out does not create more tax, and leaving money in does not avoid it. What changes with the LLC's tax status is whether you can be an employee of your own business, and whether some of your pay comes through payroll. See how LLCs are taxed for the four classifications.

The four situations side by side

Single-member LLC: owner's draws

You cannot put yourself on the payroll of a single-member LLC taxed as a disregarded entity, because for income tax you and the LLC are the same taxpayer. Instead you transfer money from the business account to your personal account whenever you choose. That transfer is an owner's draw.

• A draw is not an expense of the business and does not reduce its profit.
• You pay income tax and self-employment tax on the LLC's whole profit for the year, whatever you drew.
• Nothing is withheld, so you usually need to pay estimated tax during the year. See estimated quarterly taxes.

Record each draw in the books as a reduction of the owner's equity, not as an expense.

Multi-member LLC: distributions and guaranteed payments

Partners are not employees of the partnership either. They take money out in two ways:

• Distributions are payouts of profit, usually in line with the operating agreement. They are not deductible and do not change the partners' taxable shares.
• Guaranteed payments are fixed amounts paid to a partner for services or for the use of capital, whatever the profit. They are deductible by the partnership and taxable to the partner, and payments for services are generally subject to self-employment tax.

Guaranteed payments suit partners who work different amounts. The partner who runs the business day to day can receive a fixed payment for that work before the rest of the profit is shared.

Fixed payments to working partners are explained in guaranteed payments to partners.

LLC taxed as an S corporation: salary plus distributions

With S status, an owner who works in the business becomes its employee. You pay yourself a salary through payroll, with income tax and payroll taxes withheld, and the company files payroll returns. Profit left after salary can be paid out as distributions, which carry no payroll tax.

The salary must be reasonable for the work you do. Setting it very low to shift pay into distributions is the main risk with S corporations, because the IRS can treat distributions as wages. See when an S corp election saves tax.

LLC taxed as a C corporation: salary and dividends

An owner who works in the business is paid a salary through payroll, which the company deducts. Profit that remains is taxed in the company at 21%. When it is paid out as dividends, it is taxed again on your return. Many owners of small C corporations therefore pay themselves mainly through salary, within what is reasonable for the work.

If you are a foreign owner

For a single-member LLC owned by a foreign person, every transfer from the LLC to you is a distribution that must be reported on Form 5472, and so is every transfer from you into the LLC. Keep a running log with dates and amounts. See bookkeeping for a single-member LLC. See how non-residents take money out of a US LLC. Whether the money is taxable in the US depends on where the business is carried on, not on the transfer itself. See whether foreign-owned US LLCs pay US tax.

Practical rules

• Pay yourself by bank transfer from the business account to your personal account. Do not pay personal bills directly from the business account.
• Set aside tax before you take money out. For pass-through LLCs, the tax is on the profit, and it is easy to spend money that is owed to the IRS.
• Keep enough in the business for upcoming bills, payroll and tax payments.
• Record every payment the same way each time, so that year-end figures reconcile.

This guide is general information. It is not tax or legal advice for your situation.