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How to Pay Yourself as an LLC Owner

As an entrepreneur, understanding how to pay yourself properly as an LLC owner is crucial for both financial stability and tax efficiency. If you’ve ever wondered how to take money out of your business without triggering unnecessary IRS scrutiny, this guide is for you. Let’s break it down step by step.

Paying Yourself as a Sole Proprietor LLC

If your LLC is taxed as a sole proprietorship (the default for single-member LLCs), you will use an owner’s draw to pay yourself. This means transferring money from your business bank account to your personal account as needed—no payroll required.

However, there’s a key consideration: All business profits are taxed whether you withdraw the money or not. Even if you decide to leave $50,000 in your business account for future investments, you will still owe income tax and self-employment tax (15.3%) on that amount. This tax setup can be a drawback if you’re looking to optimize savings.

Paying Yourself as an S Corporation

If your LLC is taxed as an S corporation, things work a little differently. Instead of taking an owner’s draw, you’ll need to pay yourself a reasonable salary through W-2 payroll. This means you’ll have federal, state, Social Security, and Medicare taxes withheld just like a regular employee.

The main advantage? Any remaining profits beyond your salary can be taken as distributions, which are not subject to self-employment tax.

Example Scenario

Imagine your LLC earns $150,000 in net profit. If you remain a sole proprietorship, you’ll pay self-employment tax (15.3%) on the full amount, in addition to income tax.

However, if you elect S corporation taxation and set a reasonable salary at $70,000, you’ll only pay Social Security and Medicare taxes on that salary, while the remaining $80,000 is taken as distributions—which are not subject to self-employment tax.

In this scenario, you could save around $12,000 in self-employment taxes alone.

What’s a ‘Reasonable’ Salary?

The IRS requires S corp owners to pay themselves a reasonable compensation before taking distributions. But what does that mean?

The IRS looks at:

  • Industry standards for similar job roles (check sites like Glassdoor or the Bureau of Labor Statistics)
  • Your level of experience and responsibilities
  • The profitability of your business

If your salary is too low, the IRS might flag your return for an audit. If it’s too high, you’re overpaying in payroll taxes. Working with a CPA can help you determine the right balance.

Why This Matters

Take Sarah, a business owner who switched her LLC to an S corp last year. By structuring her salary and distributions properly, she saved $14,000 in taxes, which she reinvested to hire her first employee.

Conclusion

For LLC owners, choosing the right way to pay yourself can significantly impact your tax burden and financial health. Whether you use an owner’s draw or elect S corp status to optimize payroll and distributions, understanding the IRS guidelines is key. If you’re unsure about the best structure for your business, consulting a professional can make a world of difference.

If you need help setting up payroll or structuring your LLC, contact Guerrero CPA at 210-490-7100. Our team is ready to guide you through tax strategies, compliance, and payroll setup to help you keep more of your hard-earned money.