In most cases, LLC owners cannot pay themselves through payroll unless the LLC has elected S-corporation or C-corporation tax status. By default, single-member and multi-member LLC owners take “owner’s draws” from profits, which are taxed on their personal returns and subject to self-employment taxes.
How LLC Owners Pay Themselves Under Default Tax Status
LLCs are flexible entities created under state law, but the IRS does not recognize an LLC as a tax classification. Instead, the IRS assigns LLCs a tax treatment based on the number of members.
Single-Member LLCs
A single-member LLC is treated as a disregarded entity, much like a sole proprietorship. The owner pays themselves through an owner’s draw, not a paycheck. All profits flow directly to the owner’s Schedule C on their personal tax return and are subject to both income tax and self-employment taxes.
For example, if your single-member LLC makes $75,000 in profit, you don’t cut yourself a paycheck. Instead, you withdraw funds directly from the business, and the IRS taxes the entire $75,000 as business income and self-employment income.
Multi-Member LLCs
Multi-member LLCs are taxed as partnerships by default. Owners (called members) receive their share of profits through draws consistent with the LLC’s operating agreement. Each member reports income on their personal return via a Schedule K-1 issued by the LLC. Members may also receive guaranteed payments for services, which are taxed like wages but are not processed as payroll.
For example, if a two-member LLC earns $100,000 and each partner has a 50/50 split, each member reports $50,000 on their personal tax return, regardless of whether that money is physically withdrawn.
When Can LLC Owners Be on Payroll?
LLC members can only be on payroll (receive W-2 wages) if they elect to be treated as an S corporation or C corporation for tax purposes.
Electing S-Corporation Status
To elect S corporation taxation, the LLC files Form 2553 with the IRS. Owners then become shareholder-employees. This means they must pay themselves a reasonable salary through payroll, subject to standard employment taxes, and they can also distribute profits as dividends not subject to self-employment tax.
For example, an S corp owner might earn a $60,000 reasonable salary (reported on a W-2), plus $40,000 in profit distributions. Only the salary is subject to payroll taxes, though the full $100,000 is still taxed as income.
Electing C-Corporation Status
An LLC may instead file Form 8832 to be taxed as a C corporation. In this case, members become shareholders and can be official employees, receiving W-2 wages. Profits left in the company are taxed at the corporate rate, while dividends distributed are taxed again on the shareholder’s personal return. Because of this “double taxation,” small business owners more often choose S corp status over C corp.
Owner’s Draw vs. Salary: Key Differences
With default LLC taxation, an owner’s draw is the typical method of paying yourself. Draws are not a deductible business expense, and all profits are taxed whether or not they are withdrawn. No formal payroll is required, making it a simple method but one that leaves the entire profit subject to self-employment tax.
By contrast, an LLC taxed as an S corp or C corp allows owners to take a salary. Salaries are processed through payroll, must be “reasonable” for the work performed, and are subject to employment taxes. This structure provides W-2 documentation that can be helpful when applying for loans or personal financial purposes.
In short: draws are for default LLCs, while salaries apply only when an LLC is taxed as a corporation.
Switching from Draws to Payroll (LLC → S-Corp)
If you want to start paying yourself through payroll, here’s the general process:
- Form an LLC with your state (if you haven’t already).
- Elect S corp tax status with the IRS by filing Form 2553.
- Set up a payroll system through software or a payroll provider.
- Determine reasonable compensation for your role.
- Run payroll and withhold employment taxes.
- Take additional profits as owner distributions.
- Stay compliant with state payroll filings and annual reports.
Common Mistakes to Avoid
Many LLC owners run into the same issues when paying themselves. Mixing personal and business funds is a frequent mistake, which can jeopardize liability protection. Failing to pay reasonable compensation in an S corp structure can trigger IRS scrutiny. Skipping an operating agreement creates uncertainty around distributions, and not setting aside enough for self-employment taxes often leads to unpleasant surprises. Once an LLC elects S corp or C corp status, missing payroll compliance deadlines is another common error to avoid.
Frequently Asked Questions
Can an LLC owner pay themselves a salary?
Not under default taxation. Salaries are only permitted if the LLC elects S corp or C corp tax status.
How do single-member LLC owners get paid?
They typically use an owner’s draw. Profit is reported on Schedule C and subject to self-employment tax.
Can multi-member LLC owners be on payroll?
By default, no. They take draws and may also receive guaranteed payments. To be on payroll, the LLC must elect S or C corp taxation.
Do LLC draws avoid taxes?
No. Draws are not taxed when withdrawn but are included in the owner’s taxable income regardless.
When should an LLC elect S corp status?
Usually when profits are high enough that splitting between salary and distributions results in payroll tax savings after accounting for compliance costs.
Can LLC owners get W-2 wages?
Yes, but only after an S corp or C corp election. Otherwise, members cannot receive W-2s.
Is a guaranteed payment the same as salary?
No. Guaranteed payments to members are taxed like wages but are not formal payroll, and no W-2 is issued.
Can an LLC owner switch between draws and payroll?
Yes. An LLC can begin with draws and later elect S corp taxation to start payroll.
Bottom Line
LLC owners usually pay themselves through draws unless their business elects S corp or C corp status. Moving to payroll can provide tax savings and added credibility but comes with stricter IRS rules and compliance requirements. For many owners, consulting a CPA is the best step to determine when switching makes sense.
For more information, visit the IRS: LLC Filing as a Corporation or Partnership and the SBA: Choose Your Business Structure.
Learn more about LLCs and business formation on the Cornerstone Licensing Homepage.
