How to Pay Yourself as a LLC: The Playbook That Cuts Taxes and Keeps the IRS Happy

Most LLC owners think paying themselves is as simple as writing a check from the business account. That thinking is exactly why thousands pay the IRS more than they should and expose themselves to expensive tax penalties. What if you knew every legitimate (and audit-proof) way to pay yourself—while keeping more profits in your pocket for 2025?

Quick Answer: How Should LLC Owners Pay Themselves?

The best way to pay yourself as an LLC depends on how your business is taxed and what the IRS expects from you (hint: it’s different for single-member and multi-member LLCs, and completely changes if you elect S Corp status). For 2025, you can use member draws, guaranteed payments, or S Corp payroll—and each path changes your tax, compliance, and audit risk. Here’s a breakdown of each approach, plus IRS forms, amounts, and when each makes sense.

Why LLC Tax Status Dictates Your Paycheck

The default tax treatment for an LLC by the IRS is a “disregarded entity” if you’re a single member—meaning you file your business net income directly on your personal tax return (IRS Form 1040, Schedule C). For multi-member LLCs, the IRS treats you as a partnership (Form 1065 with K-1s for each owner). Either way, the government doesn’t mandate a salary like they do for corporations.

But, everything changes if you elect to have your LLC taxed as an S Corp through Form 2553 (and, for California, Form 100-S). In that case, as an owner-employee, you must pay yourself a “reasonable” W-2 salary and run payroll—if not, the IRS can reclassify all your take-home as wages and charge you retroactive payroll taxes, penalties, and interest.

For example: Jane runs a freelance design studio as a single-member LLC. If she leaves her business taxed as a default LLC, she can take member draws whenever she wants—no payroll, no extra paperwork. But if she elects S Corp status, she must run payroll and pay herself a W-2 salary, processed through a payroll system, before taking additional distributions. If she makes $120,000 in annual profit, the split between salary and distributions can make a $5,000-$12,000 difference in self-employment taxes.

Three Proven Methods to Pay Yourself from Your LLC

1. Owner’s Draw (Member Draw): The default for single-member (and many multi-member) LLCs. You simply transfer money from the business to your personal account. No payroll taxes are withheld, but you will owe self-employment tax (Social Security and Medicare) on all business profits at tax time. There is no set schedule—take draws as often or as rarely as you wish; just be consistent and document every withdrawal. You’ll report all on your personal return via Schedule C (or K-1 for multi-member).

• Example: If your LLC profits $80,000, you can take out $2,000 every other week, noted as “Owner’s Draw” in your books. At tax time, expect to pay self-employment tax (15.3%, or $12,240) plus regular income tax.

2. Guaranteed Payment (for Partnerships): If you run a multi-member LLC, you may be paid by guaranteed payment (a fixed payment agreed in your LLC operating agreement, regardless of company profit). These amounts appear on your K-1 and are subject to self-employment tax. Typically, this is used when some members contribute more sweat equity than others.

• Example: Two owners split a business 60/40. The 60% owner works in the business, the 40% owner is passive. Owner A receives a $3,000/month guaranteed payment for running operations, Owner B takes only profit distributions. IRS requires both report their share accordingly. See IRS Form 1065 instructions.

3. Payroll Salary (if Electing S Corp): If your LLC elects S Corp treatment, you are legally considered both owner and employee. This means you must pay yourself a “reasonable” salary, subject to payroll taxes, via W-2. IRS scrutinizes S Corp owners who take low or no salary but large distributions (and will reclassify excessive distributions as wages during an audit). Set up payroll just like you would for any employee, file quarterly payroll returns, and issue yourself a W-2 at year end. Any profits beyond your reasonable salary can then be taken as distributions, which are not subject to self-employment tax, only income tax.

• Example: You own an S Corp LLC that nets $180,000 in profit. You pay yourself a $70,000 W-2 salary (paying payroll taxes), and take the remaining $110,000 as distributions (no payroll tax). This could save $13,000 in Medicare and Social Security taxes compared to taking it all as salary—see details in IRS Publication 3402.

Pro Tip: Use a robust bookkeeping solution to track all owner draws, payroll, and guaranteed payments. Proper tracking makes tax filing—and any audit defense—much easier.

When Is Payroll the Only Option?

A payroll system is only legally required for LLCs with S Corp or C Corp election. Don’t waste money on payroll services or software unless you’ve filed IRS Form 2553 for S Corp status. For other LLCs (single or multi-member), draw is enough, but strong records are essential. Attempting to “pay yourself a salary” without S Corp status only adds cost and confusion—with no compliance benefit.

If S Corp, be careful to set a reasonable salary. Owners who pay themselves $20,000 on $200,000 profit will get flagged (and possibly penalized) in audit. Use market rates for your industry and adjust for business profitability. If you’re unsure, a custom consultation is recommended.

Red Flag: Common IRS Mistakes When Paying Yourself as an LLC

Red Flag Alert: The number one IRS trigger is commingling funds—using your business account like a personal piggy bank. Always pay yourself with clear transfers: “Owner’s Draw”, “Distribution”, or “Payroll” with supporting memo/documentation. Never pay personal bills directly from your LLC account. The IRS can disregard your LLC status and “pierce the veil” if you ignore this. In 2023, more than 21,000 California LLCs were audited over improper payouts and poor recordkeeping. IRS guidance here.

Pro Tip: Set up a recurring transfer for owner draws. Consider weekly, biweekly, or monthly—and review your cash flow first. Automated, scheduled draws look more like real business compensation and less like random withdrawals.

KDA Case Study: LLC Owner Saves Big with Tax-Efficient Payouts

Client: Sarah, founder of a consulting firm, single-member LLC, $150K profit/year.
Problem: Sarah took random owner draws each month, sometimes paying business and personal bills from a single card. She worried about IRS scrutiny and suspected she was overpaying in taxes.
Solution: KDA set up a biweekly draw schedule and helped Sarah elect S Corp status for her LLC. We implemented W-2 payroll for $68,000/year using Gusto, and Sarah took remaining profits as distributions.

Result: Sarah’s self-employment tax dropped by over $10,000 for the year (verified via side-by-side calculation using Schedule SE for non-S Corp vs. S Corp approach). She invested $3,000 total in bookkeeping/paperwork services, netting a 3.3X first-year ROI—and Sarah’s books were squeaky clean for her year-end taxes, helping her sleep better at night.

FAQs About Paying Yourself from an LLC

What’s the difference between distributions and draws?

They’re often used interchangeably. Both are owner withdrawals, but “distributions” usually refer to profits issued (after all business expenses), while “draws” can be more routine withdrawals. Either way, document with clear transaction notes in your books.

What if my LLC didn’t make a profit this year?

You can only take owner draws or distributions from actual business profits. If you didn’t make a profit, avoid taking out cash—it can cause cash flow or tax issues, especially if you operate in California, where annual franchise taxes still apply ($800 minimum).

How often can I pay myself?

As often as you like (for standard LLCs)—as long as it’s well-documented and consistent. For S Corps, follow a regular payroll schedule first, then issue distributions as desired when profits permit.

Do I need to issue myself a 1099?

No, owners do NOT issue themselves a 1099 for draws, distributions, or guaranteed payments. Only W-2 salaries (for S Corp owners) result in an official wage statement to yourself.

Where do I enter what I paid myself on my taxes?

Disregarded entity (single member): On Schedule C.
Multi-member: Each owner receives a K-1 from Form 1065.
S Corp: Report W-2 salary on your personal taxes and S Corp profits on K-1.

What If I Change My LLC’s Tax Status—How Does My Pay Change?

If you file IRS Form 2553 to elect S Corp status mid-year, your pay must shift to regular payroll for part of the year onward. It’s smart to plan this change for the beginning of the tax year and work with an accountant or payroll provider. If you do this mid-year, you may need to split your profits and retroactively adjust paychecks and withholdings, complicating bookkeeping and tax paperwork. Explore our tax planning options for LLCs to avoid costly mistakes.

Don’t Let the IRS Decide Your Paycheck—Take Control Now

The sad reality is most LLC owners either take too little or too much compensation—or document it incorrectly—risking audits, penalties, and thousands in lost tax savings. But when you use the right payout method for your LLC type, you keep more in your pocket, slash audit risk, and feel confident every deposit is documented and legal.

Book Your Tax Strategy Session

If you’re unsure whether your current payout method is burning cash or putting your LLC at audit risk, now’s the time for clarity. Book a strategy session with our team and leave with a step-by-step pay plan and crystal-clear compliance strategy for 2025. Click here to book your consultation now.