How to Pay Yourself in an LLC

By Michelle Kaminsky, J.D.

How to Pay Yourself in an LLC

By Michelle Kaminsky, J.D.

A limited liability company (LLC) offers several advantages, including protecting its owners, also called “members," from personal liability, but how does an LLC owner-member get paid?

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You have two main options for how to pay yourself in an LLC:

  1. Pay yourself wages as an employee of the LLC on a regular basis; or
  2. Pay yourself profits as a member of the LLC at the end of the year, though you may also pull periodic draws, which are early withdrawals of anticipated year-end profits.

Paying Yourself Wages as an LLC Employee

Any LLC member who is actively involved in the operation of the business of the LLC is eligible to receive wages as an employee, which can be helpful for those who require or simply desire steady, predictable income. For example, if, as an LLC member, you provide marketing services to the company's clients, you are an active member of the LLC and can set yourself up as an employee.

If there are multiple LLC members who participate equally in the operation of the company, however, you can't pay one employee wages but not the others. You can, however, set it up so that if you are the only member in a management role, you can also be the only one to receive wages.

On the other hand, if you are an LLC member solely because you have invested cash into the company but aren't involved in any actual business of the LLC, you are not an employee and cannot receive wages.

Tax Considerations Regarding LLC Employee Wages

When you pay yourself as an employee of the LLC, the LLC must withhold income and employment taxes from your pay and also pay the employer portion of employment taxes on your wages. From the LLC's side, the company will deduct wages as an operating expense from the LLC's profits. The IRS allows only reasonable wages to be deducted, so keep this in mind when figuring out appropriate compensation. Bonuses are also permitted, though they also must be reasonable to be deductible.

Any member who will be paid as an employee of the LLC must file an IRS Form W-4 to calculate the amount of payroll tax to be withheld from each paycheck and will pay income taxes on wages earned. The LLC pays the member-employee as a W-2 employee of the LLC.

It is also possible for a member of an LLC to receive compensation as an independent contractor of the LLC, although there is typically little value in structuring member compensation this way. An independent contractor must file a Form W-9 with the LLC, and the LLC must file a Form 1099-MISC at the end of the year. An independent contractor is also responsible for paying self-employment taxes on any amount earned over $400; this is because the LLC does not pay employment taxes for independent contractors, nor does it withhold income or employment taxes from their wages.

Paying Yourself Profits as an LLC Member

LLC members always have the option to receive compensation in the form of year-end profit distributions. Each member has a percentage interest in, or a percentage of ownership of, the LLC, called the member's “capital account." Year-end profits typically pass through the LLC to its members based on their percentage interest. For example, if you own 25 percent of the LLC and the LLC's profits were $100,000, you would receive $25,000.

LLC members may also choose to receive periodic, scheduled payments throughout the year rather than waiting until the year-end distribution of profits. As an LLC member, each time you receive a draw during the year, your capital account decreases by the amount of the draw. Then, at the end of the year, your capital account goes back up when profits are accounted to you.

Tax Considerations Regarding LLC Profits

If you are the only member of the LLC, you must file a Schedule C to report the profits and losses of the company with your personal income tax return and pay income tax on your distributions. If there is more than one LLC member, each member reports his or her share of the profit and pays income tax on that. The LLC must file Form 1065 to report how profits are divided among the members.

If you will receive draws during the year, the appropriate accounting procedures need to be in place to keep track of all the draws in order to estimate year-end profits and to track your capital account. This can get complicated and may require the assistance of an experienced accountant.

One important consideration is that, even if you receive wages as an employee, you are still entitled to year-end distributions as well.

You may also choose to not pay yourself anything and leave the profits in the LLC, but income tax is still due on the profits because they pass through to your personal tax return.

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.