Guerrero CPA LLC

ED Guerrero
Menu

Correct way to pay yourself as an LLC owner

Paying yourself isn’t about taking money out—it’s about taking it out the right way. The method you choose depends on how your LLC is taxed, and getting it wrong can mean higher taxes and unnecessary headaches. Here’s how to do it strategically.

Strategy 1: Use the Owner’s Draw

For most LLCs (single-member or multi-member by default), the IRS treats your business as a pass-through entity. That means you are not considered an employee—you pay yourself through an owner’s draw.

How it works:

  • Transfer funds from your business account to your personal account.

  • Withdrawals aren’t taxed upfront. You’ll pay income and self-employment taxes later.

  • Plan ahead: Set aside 25–30% of each draw for quarterly estimated taxes.

👉 Best for: LLCs with simple structures or owners who prefer flexible payments.

Strategy 2: Pay Yourself a Salary (S Corp or C Corp)

If your LLC elects to be taxed as an S corporation or C corporation, the IRS considers you an employee. That means you must pay yourself a reasonable salary.

Key points:

  • Run payroll and withhold income tax, Social Security, and Medicare.

  • Receive a W-2 at the end of the year.

  • With an S corp, profits beyond your salary can be taken as distributions, which aren’t subject to self-employment taxes.

👉 Best for: Profitable LLCs that want to save on self-employment tax.

Strategy 3: Keep It Clean and Compliant

No matter how you pay yourself, stick to these best practices:

  • Separate accounts: Never mix business and personal finances.

  • Keep records: Document every draw or paycheck.

  • Plan for taxes: Work with a CPA to avoid surprise bills.

Case Study: John’s LLC Pay Strategy

John owns a profitable consulting LLC. At first, he paid himself through owner’s draws only. After his business grew, his CPA recommended electing S corp status:

  • John now takes a $70,000 salary (reasonable for his role).

  • He also takes $50,000 in distributions.

  • By splitting pay this way, he reduces self-employment taxes and saves $7,500 per year.

Conclusion

Paying yourself isn’t one-size-fits-all. The right choice depends on your LLC’s tax status, cash flow, and long-term goals. Owner’s draws work for many, but switching to an S corp salary-plus-distribution model can unlock real tax savings.

💡 Want to find the smartest strategy for your situation? Call Guerrero CPA at 210-490-7100 and schedule a tax strategy consultation today.