How to pay yourself from an LLC or S corp

Two people both own an LLC and both want $5,000 a month. One just transfers it from the business account. The other has to run payroll, withhold tax and file quarterly forms. The difference is how each LLC is taxed. The letters LLC tell you nothing here, and if you use the wrong method you can owe payroll tax you never withheld.

Which method goes with which tax type

Single-member LLC: the owner's draw

By default the IRS treats a single-member LLC as a "disregarded entity." Its profit goes straight onto your Form 1040, usually on Schedule C, and you pay self-employment tax like a sole proprietor.

You can't put yourself on payroll. The Treasury regulation on disregarded entities has an example with an owner called A: the LLC must run payroll for its workers, but "A is not an employee of LLCA." A owes self-employment tax on the LLC's earnings instead.

So you just move money from the business account to your personal one. That's a draw. It isn't a deduction and it isn't income. You owe tax on the profit, not on what you took out. Draw $20,000 from a business that made $90,000 and you're taxed on $90,000.

Self-employment tax is 12.4% for Social Security and 2.9% for Medicare, on 92.35% of net earnings, per Topic 554. There's a longer worked example in the self-employment tax guide.

Multi-member LLC: guaranteed payments and distributions

An LLC with two or more members is taxed as a partnership by default. The IRS paying yourself page is blunt: "Partners are not employees and should not be issued a Form W-2." There are two ways money goes out.

Guaranteed payments. Publication 541 defines them as payments to a partner "determined without regard to the partnership's income." For example, a fixed monthly amount for the member who works full time. The LLC deducts them, and they show up on that member's K-1. They're "not subject to income tax withholding," so the member covers the tax with estimated payments.

Distributions. Cash taken out against your share of profit. Under section 731 a distribution is generally not taxed, unless the money exceeds your basis in the LLC. Pub 541 says a draw taken during the year "in anticipation of the current year's earnings" counts as a distribution on the last day of the year.

You still pay tax on your full share of profit, whether you take it or leave it in the business.

For self-employment tax, section 1402 counts a partner's distributive share. Limited partners are excluded on their share, but not on guaranteed payments for services. The statute speaks of limited partners. Before you treat an LLC member that way, ask a preparer.

S corp: salary first, then distributions

An LLC that elects S corp status changes the whole picture. The IRS says "an officer of a corporation is generally an employee," so you go on payroll and get a W-2.

The IRS also says S corps "must pay reasonable compensation to a shareholder-employee" before taking distributions that aren't wages. How to set that number is in reasonable salary.

Salary carries Social Security and Medicare: 6.2% each for employer and employee, plus 1.45% each, with Social Security stopping at $184,500 of wages in 2026 (Topic 751). Distributions carry neither. Under section 1368, an S corp with no accumulated earnings and profits can distribute up to your stock basis without it counting as income. Anything above basis is treated as a gain.

That gap is why people elect S corp status, and why the IRS can reclassify distributions as wages when the salary is too low.

Example: $120,000 of profit, three ways

Single-member LLC. The owner takes $5,000 a month, so $60,000 for the year, and leaves the rest in the bank. Tax is still on all $120,000. Self-employment tax is $120,000 × 92.35% × 15.3% = $16,955.46.

Two-member LLC. Member A works full time and gets a $50,000 guaranteed payment. The remaining $70,000 splits 50/50. A reports $85,000 and B reports $35,000. If both are general members, both owe self-employment tax on those amounts.

S corp. The owner takes a $60,000 salary. Social Security and Medicare come to $4,590 from each side, $9,180 total. After the salary and the employer's $4,590, about $55,410 of profit is left to distribute, free of payroll tax.

The S corp saves payroll tax here. It also adds a payroll service, a separate return and state costs, covered in S corp payroll costs. Run your own numbers in the S corp savings calculator or the self-employment tax calculator.

Mistakes that cost money

• Paying yourself a W-2 from a single-member LLC that never elected S corp status. You're not an employee of it.
• Taking S corp distributions with no salary at all.
• Forgetting estimated tax on draws and guaranteed payments, since nothing is withheld.
• Distributions above basis, which can turn into a taxable gain.

If you don't know which type you have, pull the last return the business filed. A Schedule C on your 1040 means disregarded. A Form 1065 is a partnership return and a Form 1120-S is an S corp return. The business structure switch calculator compares what moving between them would cost.