One of the most common questions business owners ask is, “I own an LLC. How do I pay myself?” The answer depends on how your LLC is taxed, not just the fact that it’s an LLC. Understanding the difference is critical for staying compliant and avoiding costly mistakes.
LLCs offer flexibility, but that flexibility can also create confusion if your bookkeeping and accounting aren’t aligned with your tax structure.
If your LLC is taxed as a Sole Proprietorship, you do not pay yourself through payroll. Instead, you take what’s called an owner’s draw. An owner’s draw is simply money you move from the business account to your personal account. It is not considered a payroll expense and does not reduce your taxable profit. You’ll still pay income taxes and self-employment taxes on the business’s net profit, regardless of how much you draw out.
For many small or early-stage businesses, this structure is simple and effective, as long as owners understand that draws are not “paychecks” and need to be planned carefully to avoid cash flow issues.
If your LLC is taxed as an S-Corporation, the rules change significantly. In this case, you are required to pay yourself a reasonable salary through payroll. That salary is subject to payroll taxes, just like any other employee’s wages. In addition to your salary, you may also take owner distributions from the remaining profits. These distributions are not subject to payroll taxes, which is why S-Corp elections can offer tax advantages when structured correctly.
However, the keyword here is reasonable. Underpaying yourself through payroll to avoid taxes can trigger penalties and IRS scrutiny. Proper payroll setup and ongoing accounting support are essential for S-Corporation compliance.
If your LLC is a Multi-Member LLC taxed as a Partnership, owners generally do not pay themselves through payroll. Instead, they take owner’s draws or guaranteed payments, depending on the operating agreement and how the business is structured. Guaranteed payments are typically used when owners receive compensation regardless of profitability, while draws are tied to available profits.
Across all LLC types, the biggest risk isn’t choosing the wrong method; it’s not understanding the rules tied to your tax classification. Paying yourself incorrectly can lead to tax issues, cash flow strain, and inaccurate financial reporting.
With the right bookkeeping and accounting systems in place, paying yourself becomes clear, compliant, and predictable, not stressful.
If you’re unsure whether you’re paying yourself correctly based on your LLC’s tax classification, getting clarity now can prevent costly issues later. Thornley & Knight helps business owners align bookkeeping, payroll, and accounting so owner compensation is handled accurately and with confidence. Contact us to make sure your pay strategy supports compliance, cash flow, and long-term growth.