Paying Yourself as an LLC Owner
Generally, an LLC’s owners cannot be considered employees of their company nor can they receive compensation in the form of wages and salaries. To get paid by the business, LLC members take money out of their share of the company’s profits.
Although not common in all LLCs, owners can also receive salaries or wages for their work in the company. This is more typical when the LLC has a larger number of employees or when the owner takes on specific roles and responsibilities within the business. Salaries and wages are subject to payroll taxes and are treated as ordinary income.
The company’s owners are paid based on the LLC’s tax system, as well as the number of members. An LLC can have multiple members but can also be owned by a single person. Companies operated by a sole member are classified as single-member LLCs, while companies with 2 members or more are called multi-member LLCs.
In order to become a member, the candidate must make a capital contribution. Any profits earned by the company will be shared between all contributors according to the rules of distribution outlined in the operating agreement.
By default, a single-member LLC is a disregarded entity taxed like a sole proprietorship. In this default tax situation, an LLC owner generally cannot pay themselves a salary. Instead, they can take money from the LLC’s earnings throughout the year as LLC owner draws.
So, as an LLC owner, you can pay yourself as an employee if you meet IRS criteria for reasonable salary compensation. Your LLC’s tax status determines options like payroll deductions and eligibility for fringe benefits.
Tax Considerations and Member Compensation
As an owner of a limited liability company, known as an LLC, you’ll generally pay yourself through an owner’s draw. This method of payment essentially transfers a portion of the business’s cash reserves to you for personal use. For multi-member LLCs, these draws are divided among the partners. If the LLC is taxed as a corporation, in addition to any distributions received, you also have to take a salary that meets certain requirements.
For many LLC owners, the most advantageous way to receive payment is to treat yourself as an employee. In this arrangement, you—and other owners who actively work in the business—are employees/owners, and you receive paychecks just as you would as an employee of someone else’s business. Employee wages are considered operating expenses for the LLC and will be deducted from the LLC’s profits.
How to Withdraw Earnings from Your LLC
As an LLC owner, you can get paid in various ways. For single-member LLCs, owners can take draws from profits. For multi-member LLCs, partners divide draws and distributions. LLCs taxed as corporations require owners to take salaries meeting IRS requirements, in addition to draws.
Multi-member LLC payment rules vary depending on partnership or corporation designation. Partnership LLCs allow owners to take earnings as draws, similar to single-member LLCs. However, partnership LLCs are “pass-through” entities, so owners must report all distributions of profits and losses.
LLC owners may also owe self-employment taxes on their share of net income, unlike employees. LLCs offer flexibility in their legal IRS designation: Single-member LLCs are taxed as sole proprietorships, while multi-member LLCs default as partnerships but can elect corporation status.