Can I Pay Myself as an Employee as the Owner of an LLC?

By Cindy DeRuyter, J.D.

Can I Pay Myself as an Employee as the Owner of an LLC?

By Cindy DeRuyter, J.D.

As any small-business owner would likely attest, starting a new business can be a lot of work. When establishing a limited liability company (LLC), entrepreneurs often wonder whether they can legally pay themselves as employees.

Man wearing apron in restaurant and smiling down at tablet

In some cases, LLC owners, also called members, can elect to receive compensation as employees. The determination hinges on how the business is classified for tax purposes.

Understanding Income Tax Treatment for LLCs

How you and your company are taxed depends on the number of members in your LLC and how you have elected to be taxed.

Single-Member LLCs

Under IRS rules, an LLC owned by one individual is treated as a “disregarded entity" for income taxes. This means that the company does not need to file its own separate tax returns. Instead, the owner reports business income and expenses on an individual tax return using Schedule C.

LLCs Taxed as Partnerships

An LLC with two or more members is taxed as a partnership under IRS regulations. This means the LLC must file a partnership tax form and provide each member with a K-1 statement. The individual members then report that income on their own tax returns; income isn't taxed at the partnership level.

Optional C Corporation or S Corporation Taxation

While the IRS uses these default determinations for tax classification, LLCs can also choose to be taxed as either C corporations or S corporations, if certain requirements are met. With a C corporation, income is taxed both at the corporate level and at the shareholder level. S corporation income passes through to owners' individual taxes via Form K-1 and is taxed just once.

Why Does Tax Classification Matter?

The way your business is taxed determines how you can compensate yourself. If your LLC is a disregarded entity or is taxed as a partnership, you can take a “member's draw"—a term that means a withdrawal from the member's share of LLC profits—but not a salary. Income for sole proprietorships and partnerships is subject to the self-employment tax.

In contrast, LLCs that elect to be taxed as C corporations or S corporations may be required under IRS regulations to treat shareholders as employees, especially if those shareholders/owners are actively engaged in the business. In this scenario, owners receive compensation as W-2 employees, whose income is subject to the same FICA tax withholding any other employee has to pay.

Balancing Income and Expenses

In many small businesses, income isn't steady and unexpected expenses can cause cash-flow difficulties. If you opt to take a regular member's draw (for disregarded entities and LLCs taxed as partnerships) or a regular salary (LLCs taxed as corporations), keep in mind that you may need to adjust your pay occasionally in order to keep your business going.

Professional Advice Is Important

There are pros and cons associated with each type of tax classification for LLCs—what works well for one business may not make sense for another.

Because of the complexities surrounding business tax matters, owners should talk to a qualified tax accountant, attorney, or other advisor to determine how to best structure their business from a tax and compensation standpoint.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.