Here are four main ways you can receive payments from your LLC.
1. Pay Yourself as a W-2 Employee
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.
As long as your business brings in revenue consistent enough to cover your salary or wages, this can be a way to set yourself up with predictable pay for your household. According to the IRS, you have to pay yourself “reasonable compensation.” The IRS doesn’t explicitly set an amount; it just needs to be a typical amount someone doing your work gets paid.
If you pay yourself this way, you can elect to be treated as an S-corporation for tax purposes. The advantage is that you only pay FICA, Medicare and Social Security taxes (colloquially called “self-employment tax”) on the salary or wages you pay yourself, not on all business profits. That’s a tax savings of around 15% on some of your income.
2. Earn Profit Distributions
Any LLC member (a.k.a. shareholder) can be paid through profit distributionsor owner’s draws. This means passing business profits on to owners.
The process can be more complex if you’re part of a multimember LLC, but for a single-member LLC, this pretty much looks similar to the way you’d pay yourself as a freelancer. Money comes in, and you distribute it to your personal bank account.
For multimember LLCs, your operating agreement lays out how profits will be allocated and at what frequency.
The drawback of using this as your main payment method is that you’ll pay self-employment taxes on all the money that comes into your business, instead of on only a designated salary. If your business is your main source of income, you might instead pay yourself a salary as an employee and take an owner’s draw on additional profits.
3. Pay Yourself as a 1099 Independent Contractor
You can technically pay yourself as an independent contractor instead of an employee of the business—but this isn’t always advantageous for most small businesses.
Paying yourself as a contractor means you forgo taking payroll taxes out of your paycheck, and your personal account receives your full pay as with any other contractor. You typically don’t save money this way, though. Instead of paying payroll taxes from your paycheck, you pay that same amount as self-employment tax when you pay quarterly taxes as an independent contractor.
This approach could also be complex because you have to claim taxes as both the LLC owner and for your work as a contractor (as a sole proprietor or as the owner of a separate LLC). It might make sense if you’re a shareholder in an LLC that you don’t actively work for and want to provide occasional services, but it isn’t a common approach if you own and operate your LLC.
4. Keep the Money in the Business
The last option is to not give yourself a paycheck at all. You might do this if you want to put earnings back into the business instead of your pocket, or if you want to build savings within the business.
You still have to pay income taxes on any profit the business generates, even if you don’t take a paycheck or distribution. Tax authorities treat LLCs by default as pass-through entities, so those profits are included in your income for tax purposes. (The business doesn’t pay any separate tax on them.)
If you’ve elected S-corp tax treatment, be careful about using this option. Not paying yourself could pass the “reasonable compensation” test if the business isn’t generating much revenue. But you typically can’t leave money in the business to avoid paying self-employment taxes—that could cost you in fees and back taxes down the line.
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FAQs
Earn a Wage as a W-2 Employee
How do I pay myself under an LLC? ›
Getting paid as a single-member LLC
This means you withdraw funds from your business for personal use. This is done by simply writing yourself a business check or (if your bank allows) transferring money from your business bank account to your personal account.
What percentage of income should I pay myself from my LLC? ›
Some tax professionals recommend paying yourself 60 percent in salary and 40 percent in dividends to stay clear of IRS problems unless this means your salary would be too low compared to others in your field.
How do I decide how much to pay myself from my business? ›
You can calculate your owner's draw or salary percentage rate based on your company's overhead expenses and cash flow projections, as well as your business's needs. For example, you might want to set aside extra earnings to cover an expansion or new equipment, therefore taking a little less in your own salary.
What is the best way to pay yourself as a business owner? ›
Biweekly is a common choice, but you also can pay yourself more or less often. At a minimum, pay yourself quarterly to stay on top of your tax obligations. For a draw, you can just write yourself a check or electronically transfer funds from your business account to your personal one.
How to transfer money from LLC to personal account? ›
That's called an owner's draw. You can simply write yourself a check or transfer the money for your business profits from your LLC's business bank account to your personal bank account. Easy as that!
What is the most tax-efficient way to pay yourself? ›
For most businesses however, the best way to minimize your tax liability is to pay yourself as an employee with a designated salary. This allows you to only pay self-employment taxes on the salary you gave yourself — rather than the entire business' income.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
How much cash should I keep in my LLC? ›
Extra cash may also lead to frivolous spending simply because the funds are available. If you're wondering, "How much cash should I have on hand?" it can be helpful to turn to that three- to sixth-month reserves figure. Any less and the business may be at risk of not meeting its obligations if sales were to drop.
How much should an LLC put away for taxes? ›
A general rule of thumb is to set aside 30-35% of your income for your taxes. In this article, we'll talk about all the taxes you'll need to pay and why you should save this percentage amount from the money you make.
It is definitely legal to transfer money from your limited company to your personal account, as long as this is done for legitimate business reasons and it won't jeopardise the company or put it at risk of insolvency.
When to start paying yourself from your business? ›
You can start paying yourself when your business starts making enough money to cover its expenses and generate a profit. It's important to make sure that your business is financially stable before you start paying yourself.
Can I 1099 myself from my LLC? ›
If you choose to pay yourself as an independent contractor, you must file IRS Form W-9 with the LLC. The LLC then files IRS Form 1099-MISC at the end of the year. LLC members can also take a loan from the business. This option allows the members to access cash without affecting their tax liability.
How do owners of LLC pay themselves? ›
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.
How to take a draw from LLC? ›
With an owner's draw, you'll take money from the business' profits, or capital you've previously contributed, by writing yourself a check or depositing funds into your personal bank account. You can take fixed draws at regular times or as needed.
What percentage should a small business owner pay themselves? ›
Some financial advisors recommend you put aside 30% of your net profits for taxes, and 20-25% on retirement. Once you have set those aside, see how much you have left over to pay yourself. Retirement is another way to set yourself up for success in the future and have your own back.
Is an owner's draw considered income? ›
For many individuals, an owner's draw is classified as income and may be subject to federal, state, local, and self-employment taxes, so it's important to plan ahead before filing taxes.
Can an LLC owner be a W2 employee? ›
A limited liability company can deduct its employees' wages as a business expense, reducing the company's taxable profit. The owners of the LLC, however, aren't employees of the business and therefore can't be paid wages -- sometimes called "W-2 income" after the federal form that reports such pay.
Does a single-member LLC get a 1099? ›
For example, a single-member LLC is taxed like a sole proprietorship, so you'll be required to file a 1099 when doing business with one. However, an LLC that elects S-corp tax status is subject to corporate reporting requirements, so filing a 1099 is unnecessary.
