How to pay yourself from an LLC? [2024 Startup Edition]

How To Pay Yourself From An LLC [2024 Guide for US Companies]

Paying yourself from an LLC isn't as straightforward as drawing a regular paycheck. As the owner of a Limited Liability Company, you must understand the different methods of compensation and their implications for your finances and taxes.

The process differs depending on whether you're a single-member LLC or part of a multi-member LLC—and it's important to choose the method that best suits your business structure and personal financial goals.

This article outlines the various options for distributing profits, adhering to IRS regulations, and ensuring that your personal and business finances remain in good health.

Best Practices for Compensation

There are three main ways to pay yourself from an LLC: taking an owner's draw, being a W-2 employee, and hiring oneself as an independent contractor. Let's discuss all in detail.

Take an Owner’s Draw (Profit Distributions)

Owner's draws, also known as profit distributions, are a common method for LLC members to receive payment. This involves taking money out of the LLC's profits. 

The amount and frequency of these draws can be determined by the LLC's operating agreement or at the discretion of the owner. 

It's important to note that these draws are not considered a salary or wage, and therefore, they do not require payroll taxes to be withheld.

W-2 Employee

If you opt to be treated as a W-2 employee, you, as the LLC owner, can receive a regular salary. This approach means you'll be on the company's payroll, and just like any other employee, payroll taxes will be withheld from your salary. These include federal income tax, Social Security, and Medicare contributions. 

So, receiving a consistent wage can simplify your personal budgeting, but it's essential to ensure that the salary is reasonable for the work you're doing.

Hire Oneself as an Independent Contractor

Working as a 1099 contractor for your LLC is another viable option. This allows you to invoice the LLC for your services, similar to any external freelancer or business. It's crucial to ensure that this arrangement is documented properly and that it reflects the true nature of the independent relationship. As an independent contractor, you'll be responsible for paying your own self-employment taxes, which includes both the employer and employee portion of Social Security and Medicare taxes.

For example, Mike, a graphic designer, decides to hire himself as an independent contractor for his LLC. He sets up a contract that outlines his services, rates, and payment terms. Mike invoices his LLC monthly for the work completed, and the LLC treats the payment as a business expense. This setup allows Mike flexibility in managing his taxes and business expenses but also requires him to be diligent about setting aside money for tax time, as no taxes are withheld from these payments.

Decide Not to Pay Yourself

In some cases, LLC owners may choose to reinvest all profits back into the business rather than taking a personal draw or salary. 

This strategy can be beneficial for growth, but it's important to consider your personal financial needs. If you don't take compensation, you are banking on the future success of your business to provide for your financial well-being. 

However, this approach should be carefully weighed against your current living expenses and financial obligations.

Also read: What You Need to Know About U.S. Tax Code

What Are the Tax Implications?

Deciding not to pay yourself can have significant tax implications. 

Without taking a salary or draw, you may lower your current tax liability since you're not receiving taxable income. 

However, this could affect your ability to contribute to tax-advantaged retirement accounts and could have implications for your overall financial planning. Furthermore, it's important to be aware that even if you're not taking a salary, the IRS may still expect you to pay taxes on the profits your LLC earns, depending on your chosen tax classification. 

This is known as "pass-through" taxation, where profits are passed through to members and reported on their personal tax returns. Therefore, it's critical to set aside funds for tax obligations and to understand the specific requirements for your LLC's tax situation.

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Forms to Know

When operating an LLC, familiarise yourself with key IRS forms. For example:

  • Form 1040: Used for personal tax returns, where you'll report any income from the LLC.
  • Schedule C: If you're a single-member LLC, you'll attach this to your Form 1040 to report profits or losses.
  • Schedule E: Multi-member LLCs use this form to report their share of profits and losses.
  • Form 1065: Multi-member LLCs must file this partnership return.
  • Form 1120S: If your LLC is taxed as an S corporation, this form is used to report income, losses, and dividends.
  • Form W-2: Should you pay yourself a salary, this wage and tax statement must be issued annually.
  • Form 1099-NEC: Necessary for reporting payments to independent contractors exceeding $600 in a year. Understanding these forms is integral to maintaining compliance with IRS regulations and ensuring accurate reporting of your income and business earnings.

It's also important to maintain meticulous records of all transactions, as this can greatly simplify the process of filling out these forms.

Good record-keeping practices can help avoid potential issues with the IRS and provide a clear picture of your financial standing.

PS: Inkle Books is a founder-focussed bookkeeping platform for US-registered startups. It helps you streamline your financial processes by automating bookkeeping tasks. Get real-time financial insights, simplifying tax preparation and helping you stay on top of your financial health. 


Paying oneself—be it as a draw, a W-2 employee, or an independent contractor—has distinct implications for one's personal finances and tax obligations.

Each method has its own set of advantages and considerations, such as the need for regular income, the desire for flexibility, or planning for business growth. Think of it as a strategic decision that aligns with your long-term business goals and personal financial needs.

Whether you opt for a salary, work as an independent contractor, or reinvest all profits, it's vital to plan carefully and consult with financial advisors to navigate the complexities of tax laws and ensure you're making the best choices for your situation.

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