How Much Should I Pay Myself From My LLC?
By Tania Potter ·
Short answer: it depends on how your LLC is taxed and how much cash the business can spare after its own bills and taxes. In a single-member LLC taxed the default way, you pay yourself with owner's draws, not a paycheck. If your LLC has elected to be taxed as an S corporation, you pay yourself a reasonable salary through payroll first and can take distributions on top. Either way, pick a number the business can keep paying every month, and check it against your books each quarter.
Here is how each piece works, in plain terms.
How is my LLC taxed?
An LLC is a legal structure. How it is taxed is a separate choice, and it changes how you pay yourself.
- Single-member LLC, default treatment. The IRS treats the business as part of you. Profit is reported on your personal return, on Schedule C, and you pay income tax and self-employment tax on that profit.
- Multi-member LLC, default treatment. The LLC is taxed as a partnership. Each owner pays tax on their share of the profit. Owners can take distributions, and an owner who works in the business may also receive guaranteed payments.
- LLC taxed as an S corporation. If the LLC has filed the election, an owner who works in the business must be paid a reasonable salary through payroll, with withholding and payroll taxes. Profit left after that can be paid out as distributions.
- LLC taxed as a C corporation. Owners who work in the business are paid a salary, and profit paid out later is a dividend. This is a different set of rules, so talk it through with your tax preparer first.
If you are not sure which one you are, your most recent business tax return will tell you, or your tax preparer can.
Am I taxed on what I take out, or on the profit?
Under the default treatment, you are taxed on the profit, not on what you take out. This part catches people off guard. If the business made a profit and you left every dollar in the business account, you still owe tax on that profit. If you took out more than the profit, the extra does not lower your tax.
So the question "how much should I pay myself" is mostly a cash question, not a tax question. The tax is set by the profit. Your pay is set by what the business can spare.
How do I find a number the business can carry?
Work from your bank, not from your invoices. Money you have billed is not money you have.
- Look at what actually came into the business account over the last several months.
- Subtract the business bills, including the ones that only come once or twice a year, like insurance and renewals.
- Set aside money for taxes. If you expect to owe, you will likely need to pay estimated tax during the year.
- Keep a cushion in the business account for a slow month.
What is left is the most you can pay yourself without starving the business. Start a little below that.
Why does a steady amount beat taking what is there?
Because it lets both you and the business plan. Taking whatever is in the account when a bill comes due makes it hard to tell whether the business is healthy, and hard to know how much tax to set aside.
Pick a steady amount and a schedule, such as every two weeks or every month. Move it from the business account to your personal account and record it in your books as an owner's draw, or as payroll if you are paid a salary. Each quarter, compare the year so far against your profit and adjust.
When does an S corporation election make sense?
It can, once profit is steady and high enough that the possible tax savings outweigh the cost of running payroll and filing an extra return. The rules on reasonable salary are real: the salary should match what you would pay someone else to do your job. Paying yourself only in distributions, with no salary, is a mistake to avoid.
There is no single profit level where it always makes sense. It depends on your state, your other income and your plans. This is a decision to run through with your tax preparer, with real numbers from your books.
Which mistakes should I avoid?
- Paying personal bills straight from the business account. Move money to your personal account first and record it.
- Forgetting to set aside tax money, then facing a large bill in April.
- Taking draws without recording them, so the books stop matching the bank.
- Electing S corporation treatment and never setting up payroll.
What records should I keep?
Keep every transfer from the business account to yourself labeled as an owner's draw or as payroll. Keep a copy of any tax election you filed and the IRS letter that accepted it. Keep the confirmations for your estimated tax payments.
At tax time your preparer will ask for all of these. Having them ready makes the return faster and cleaner, and it makes your pay easy to explain if anyone ever asks.
Where do I go from here?
I am a registered tax preparer (PTIN) and QuickBooks Certified, and I have run operations for businesses for 20+ years. It helps to know three things: how your LLC is taxed, what the business can spare each month, and how much to set aside for tax. If you want help setting that up, see our tax preparation and planning.
Every situation is different, so confirm the specifics for your business before you change how you pay yourself.
Book a free 30-minute finance review and we will help you set a number you can keep.
Questions owners ask
Do I pay tax on what I take out of my LLC?
In a single-member LLC taxed the default way, you pay tax on the business profit whether you take it out or not. The draw itself does not change the tax. Confirm the details for your situation with your tax preparer.
Can I pay myself a salary from my LLC?
Only through payroll if the LLC has elected to be taxed as an S corporation (or a C corporation). Under the default tax treatment, owners take draws instead of a salary.
How often should I pay myself?
A steady amount on a set schedule, such as every two weeks or every month, is easier to plan around. Review it against your books each quarter.
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