How do you pay yourself from an LLC? A quick guide to LLC payroll

Starting your own LLC comes with exciting opportunities, but it also raises critical financial questions — central to which is knowing how to pay yourself.

In this guide, we’ll break everything down simply and succinctly, from understanding how LLC payroll works to navigating taxes. We’ll also explain how, with the right tools, you can streamline the whole process, saving you time, resources, and numerous compliance headaches. So let’s jump straight in.

What exactly is an LLC?

Before diving into payment processes, it’s important to first clarify what an LLC ownership structure actually is.

An LLC, or limited liability company, is a versatile business structure that offers flexibility in how your profits are distributed and taxes are paid. There are several types of LLCs, the most popular of which include:

• Single-member LLCs: Owned by one individual.

• Multi-member LLCs: Owned by two or more people.

• LLC with employees: The LLC may employ others or hire its owner as an employee.

Understanding your LLC type is critical, as it determines whether you receive compensation as an employee, through distributions, or both.

How do you pay yourself from an LLC?

As a result, determining how to pay yourself depends on your ownership structure and tax classification.

For a single-member LLC

If you’re the sole owner of your LLC, you can pay yourself through an owner’s draw. This method allows you to withdraw money directly from the company’s profits and transfer it to your personal account.

Key features of this approach include:

• No payroll taxes. Single-member LLCs do not treat the owner as an employee, so no payroll taxes are withheld. Instead, you report income on your personal tax return using Schedule C of Form 1040.

• Frequency. You can pay yourself as often as you like — weekly, monthly, or quarterly — as long as the business has sufficient funds to cover operating expenses.

• Self-employment tax. While you avoid payroll taxes, you must pay self-employment taxes, which include both the employer and employee portions of Social Security and Medicare.

For example, if your LLC earned $100,000 in profits, and you paid yourself $60,000 as an owner’s draw, you would still owe self-employment tax on the full $60,000.

Tax and Compliance —

4 min

How are owner's draws taxed? A guide for small business owners

If you take money out of your business for personal use, here’s what you need to know about the tax consequences.

For a multi-member LLC

In a multi-member LLC, payments to members are structured differently. Compensation typically includes:

• Distributive shares. Each member receives a portion of the profits based on their ownership percentage. For example, if you own 40% of an LLC and the total profit is $200,000, your distributive share is $80,000. These profits are taxed on your personal return, regardless of whether you withdraw the money.

• Guaranteed payments. These are fixed payments made to members for their active role in the business, regardless of the LLC’s profitability. Guaranteed payments are treated as ordinary income and are subject to self-employment taxes.

It’s important to note that guaranteed payments are deductible as a business expense for the LLC, reducing its taxable income. Members must include both distributive shares and guaranteed payments on their personal tax returns.

For an S Corp or C Corp

If your LLC elects to be taxed as an S Corp or C Corp, the payment structure changes significantly. Owners can be treated as employees and paid a salary.

The Internal Revenue Service (IRS) requires owner-employees to pay themselves a “reasonable salary” based on industry standards. Paying yourself too little to avoid payroll taxes can lead to audits and potentially penalties, while paying yourself too much can create cash flow problems.

Note that, in an S-Corp, you can split your income into salary (subject to payroll taxes) and dividends (not subject to payroll taxes), potentially lowering your tax burden.

For instance, if your LLC earns $150,000 in profits, you might pay yourself a reasonable salary of $70,000 (subject to payroll taxes) and take the remaining $80,000 as dividends.

Advantages of owner-employee status:

• Simplified tax withholding. Income taxes and payroll taxes are automatically deducted from your paycheck.

• Potential tax savings. Splitting income between salary and dividends reduces your self-employment tax burden.

Disadvantages of owner-employee status:

• Additional compliance. Filing payroll tax forms and maintaining employee records require more effort.

For hybrids

Some LLC owners adopt a hybrid approach, particularly those in multi-member LLCs or in LLCs taxed as S Corps. This involves combining guaranteed payments, salary, and distributions, typically in the following way:

• Draws for flexibility: You might take periodic draws to cover personal expenses or manage cash flow.

• Bonuses: You might issue yourself performance-based bonuses that align with the LLC’s profitability.

• Salaries for predictability: You might give yourself a fixed salary to ensure stable, consistent income.

This is often an efficient approach for LLCs with varying profitability, or for owners that wear multiple hats (e.g., active management and passive ownership).

How to set up payroll for your LLC

To set up payroll, follow these steps:

1. Choose a tax classification. Based on the above information, decide how you want to be taxed. Remember that your tax classification affects your payroll processes and tax obligations (see next section).

2. Register for an Employer Identification Number (EIN) with the IRS. An EIN is required to report payroll taxes and file employment tax forms (as explained below).

3. Select a payroll system. There are multiple ways to set up and run payroll as a small business. You can do it in-house, outsource to a local provider, or use a scalable and centralized platform like Remote Payroll to automate payment schedules, calculate taxes, and ensure compliance.

Global Payroll —

7 min

How to set up payroll as an LLC: A step-by-step guide

Learn how to set up payroll for your LLC with our step-by-step guide. Understand your payroll tax obligations, and see how to simplify the entire process.

LLC payroll taxes and compliance challenges

As mentioned, you need to be aware of your payroll tax and compliance obligations when running payroll. Whether you pay yourself through distributions or a salary, LLC owners are responsible for various payroll taxes, including:

• Self-employment tax. This covers Social Security and Medicare, and is 15.3% of your earnings.

• Payroll taxes. If your LLC employs workers — including yourself — you will also need to withhold and remit federal, state, and local taxes.

If you miss tax deadlines, miscalculate payroll taxes, or misclassify your workers’ employment statuses, you can incur fines, penalties, and continued IRS scrutiny. This is another reason why it’s highly advisable to use a reliable payroll platform, such as Remote.

Tax and Compliance —

5 min

What are the tax benefits of opening an LLC?

Uncover the tax (and other!) benefits of creating an LLC for your business, and learn how to get started with this popular legal structure.

Paying yourself from an LLC might seem daunting at first, but with the right tools and guidance, it’s entirely manageable. Whether you’re using an owner’s draw, guaranteed payments, or a salary, staying compliant with LLC payroll taxes is crucial.

Remote Payroll offers a simple, seamless solution to keep you on track, with automated compliance, clear support and guidance, and extensive cost and time savings.

To learn more about how we can remove your compliance headaches and help your business flourish, speak to one of our friendly experts today.

Trust G2’s multi-country payroll leader to keep you compliant

Hire and pay your global team with Remote and get access to our team of global taxation experts.

Get started nowSchedule a demo