Here are four main ways you can receive payments from your LLC.
1. Pay Yourself as a W-2 Employee
For many LLC owners, the most advantageous way to receive payment is to treat yourself as an employee.
In this arrangement, you—and other owners who actively work in the business—are employees/owners, and you receive paychecks just as you would as an employee of someone else’s business.
As long as your business brings in revenue consistent enough to cover your salary or wages, this can be a way to set yourself up with predictable pay for your household. According to the IRS, you have to pay yourself “reasonable compensation.” The IRS doesn’t explicitly set an amount; it just needs to be a typical amount someone doing your work gets paid.
If you pay yourself this way, you can elect to be treated as an S-corporation for tax purposes. The advantage is that you only pay FICA, Medicare and Social Security taxes (colloquially called “self-employment tax”) on the salary or wages you pay yourself, not on all business profits. That’s a tax savings of around 15% on some of your income.
2. Earn Profit Distributions
Any LLC member (a.k.a. shareholder) can be paid through profit distributionsor owner’s draws. This means passing business profits on to owners.
The process can be more complex if you’re part of a multimember LLC, but for a single-member LLC, this pretty much looks similar to the way you’d pay yourself as a freelancer. Money comes in, and you distribute it to your personal bank account.
For multimember LLCs, your operating agreement lays out how profits will be allocated and at what frequency.
The drawback of using this as your main payment method is that you’ll pay self-employment taxes on all the money that comes into your business, instead of on only a designated salary. If your business is your main source of income, you might instead pay yourself a salary as an employee and take an owner’s draw on additional profits.
3. Pay Yourself as a 1099 Independent Contractor
You can technically pay yourself as an independent contractor instead of an employee of the business—but this isn’t always advantageous for most small businesses.
Paying yourself as a contractor means you forgo taking payroll taxes out of your paycheck, and your personal account receives your full pay as with any other contractor. You typically don’t save money this way, though. Instead of paying payroll taxes from your paycheck, you pay that same amount as self-employment tax when you pay quarterly taxes as an independent contractor.
This approach could also be complex because you have to claim taxes as both the LLC owner and for your work as a contractor (as a sole proprietor or as the owner of a separate LLC). It might make sense if you’re a shareholder in an LLC that you don’t actively work for and want to provide occasional services, but it isn’t a common approach if you own and operate your LLC.
4. Keep the Money in the Business
The last option is to not give yourself a paycheck at all. You might do this if you want to put earnings back into the business instead of your pocket, or if you want to build savings within the business.
You still have to pay income taxes on any profit the business generates, even if you don’t take a paycheck or distribution. Tax authorities treat LLCs by default as pass-through entities, so those profits are included in your income for tax purposes. (The business doesn’t pay any separate tax on them.)
If you’ve elected S-corp tax treatment, be careful about using this option. Not paying yourself could pass the “reasonable compensation” test if the business isn’t generating much revenue. But you typically can’t leave money in the business to avoid paying self-employment taxes—that could cost you in fees and back taxes down the line.
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FAQs
Earn a Wage as a W-2 Employee
How do I pay myself under an LLC? ›
You pay yourself from your single member LLC by making an owner's draw. Your single-member LLC is a “disregarded entity.” In this case, that means your company's profits and your own income are one and the same. At the end of the year, you report them with Schedule C of your personal tax return (IRS Form 1040).
What percentage of income should I pay myself from my LLC? ›
Some tax professionals recommend paying yourself 60 percent in salary and 40 percent in dividends to stay clear of IRS problems unless this means your salary would be too low compared to others in your field.
How to transfer money from LLC to personal account? ›
You can simply write yourself a check or transfer the money for your business profits from your LLC's business bank account to your personal bank account. Easy as that!
How do I decide how much to pay myself from my business? ›
You can calculate your owner's draw or salary percentage rate based on your company's overhead expenses and cash flow projections, as well as your business's needs. For example, you might want to set aside extra earnings to cover an expansion or new equipment, therefore taking a little less in your own salary.
What is the most tax-efficient way to pay yourself? ›
For most businesses however, the best way to minimize your tax liability is to pay yourself as an employee with a designated salary. This allows you to only pay self-employment taxes on the salary you gave yourself — rather than the entire business' income.
What is the best way to pay yourself as a business owner? ›
Biweekly is a common choice, but you also can pay yourself more or less often. At a minimum, pay yourself quarterly to stay on top of your tax obligations. For a draw, you can just write yourself a check or electronically transfer funds from your business account to your personal one.
What is the 50 30 20 rule? ›
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.
How much cash should I keep in my LLC? ›
From startups to established companies, every business needs a cash buffer. As a general rule of thumb, experts recommend small businesses save at least 3 to 6 months' worth of expenses.
How much should an LLC put away for taxes? ›
A general rule of thumb is to set aside 30-35% of your income for your taxes. In this article, we'll talk about all the taxes you'll need to pay and why you should save this percentage amount from the money you make.
Can I deposit a business check in my personal account? No, you should not deposit a check that was made out to a business into a personal account. While it may seem convenient to use both business and personal checking accounts interchangeably, it is never worth the potential problems involved.
How do I give personal money to my LLC? ›
LLC Capital Contributions
This can be done in a variety of ways, such as writing a check or transferring funds from a personal account to the LLC's account. If you're going to use capital contributions to fund your LLC, it's important to document the transaction.
Is an owner's draw considered income? ›
Owner's draw is considered taxable income, whether you're a sole proprietor, partner, or part of an LLC. If you're a single-member LLC, you'll be taxed like a sole proprietor, while multi-member LLCs are taxed like partners in a partnership.
What is a good percentage to pay yourself? ›
However, 10%-15% of your income is generally a good rule of thumb. When determining how much to pay yourself first, it's important to consider your expenses, debts and other financial obligations. For example, if you have high levels of debt, you may want to focus on paying that off before increasing your savings rate.
When to start paying yourself from your business? ›
You can start paying yourself when your business starts making enough money to cover its expenses and generate a profit. It's important to make sure that your business is financially stable before you start paying yourself.
How do you pay yourself first? ›
The "pay yourself first" budgeting method has you put a portion of your paycheck into your retirement, emergency or other goal-based savings account before you spend any of it. When you add to your savings immediately after you get paid, your monthly spending naturally adjusts to what's left.
How do I fund my LLC with personal money? ›
In all cases, it's best to start off by setting up a business bank account for your new enterprise.
- Open a bank account for your business. ...
- Choose between different sources of personal funds. ...
- Structure your personal contributions as a business loan. ...
- Risks of using your personal funds. ...
- Consider a secured business credit card.
A limited liability company can deduct its employees' wages as a business expense, reducing the company's taxable profit. The owners of the LLC, however, aren't employees of the business and therefore can't be paid wages -- sometimes called "W-2 income" after the federal form that reports such pay.
Does a single-member LLC get a 1099? ›
This is because some LLCs are treated like sole proprietorships for tax purposes and others are treated like corporations. For example, single-member LLCs are treated similar to sole proprietors and so they won't require owners to file a 1099.
