Many new business owners aren't sure how they're allowed to take money out of their LLC. Can you put yourself on payroll? Do you just transfer money to your personal account? Does it matter how you record it?
It does matter, and the answer depends on how your LLC is taxed.
How to pay yourself from an LLC depends on how it's taxed
An LLC can be taxed in three ways, and each one has its own way to pay the owner:
| How the LLC is taxed | How the owner gets paid | Can the owner be on payroll? |
|---|---|---|
| Single-member LLC (default) | Owner's draws | No |
| Multi-member LLC (default, taxed as a partnership) | Distributions and guaranteed payments | No |
| LLC that elected S corp status | A reasonable salary through payroll, plus distributions | Yes, and it's required |
If you're not sure which one applies, check the federal tax return the business filed last year. A Schedule C means a single-member LLC, Form 1065 means a partnership, and Form 1120-S means an S corp.
Single-member LLC: the owner's draw
If you're the only owner and haven't made any tax election, you pay yourself with an owner's draw. It's simply a transfer from the business account to your personal account.
A few things surprise people about draws:
- You can't pay yourself a W-2 salary. The IRS treats you as self-employed, not as an employee of your own LLC.
- A draw is not a business expense, so it doesn't lower your profit.
- You aren't taxed on the draw itself. You're taxed on the business's profit, whether you take it out or not.
So if your LLC makes $80,000 in profit and you draw only $50,000, you still pay tax on the full $80,000.
Multi-member LLC: distributions and guaranteed payments
When an LLC has two or more owners, it's taxed as a partnership by default. Owners can be paid in two ways:
- Distributions, which are each owner's share of the profit, paid out according to the operating agreement
- Guaranteed payments, which are fixed amounts paid to an owner for work they do in the business, regardless of profit
Guaranteed payments are deductible for the LLC and taxable income for the owner who receives them. Put both arrangements in writing in your operating agreement so every owner knows what to expect.
LLC taxed as an S corp: salary plus distributions
If your LLC has elected S corp status, you become an employee of your own business. You must pay yourself a reasonable salary through payroll, with taxes withheld, before taking distributions. Profit above the salary can then come out as distributions.
This is where S corps can save on self-employment tax, but it adds payroll and a separate tax return. I explain how to tell whether it's worth it in LLC vs S corp in Texas, and you can see how pay schedules work in biweekly vs semi-monthly payroll.
Set money aside for taxes
Because nobody withholds tax from an owner's draw or distributions, you're responsible for paying it yourself during the year. Most owners do this through quarterly estimated tax payments on Form 1040-ES, due April 15, June 15, September 15 and January 15.
Texas has no state income tax, so for Texas owners these payments cover federal income tax and self-employment tax. A simple habit helps: each time you take a draw, move a share of it into a separate savings account for taxes.
How to record owner's draws in your books
- Set up an equity account called Owner's draw (or one for each owner in a multi-member LLC).
- Pay yourself by transfer from the business account, not in cash, so there's a clear record.
- Record every transfer to yourself in the Owner's draw account, never as an expense.
- If you paid a personal bill from the business account, record that as a draw too.
- Review the draw account at year-end with your tax preparer.
Owner draws recorded as expenses are one of the most common mistakes I find when I take over a set of books. They make the business look less profitable than it is, and they have to be corrected before the tax return can be prepared.
Get your pay set up the right way
I've been in accounting for 38 years, and I help small business owners set up how they pay themselves, from simple draws to S corp payroll, working online from Weatherford, Texas. See my bookkeeping services or book a short intro call.
This article is general information, not tax advice for your specific situation. Tax rules can change, and the right setup depends on your own business.