What You’ll Learn

• LLC Tax Classifications (Why They Control “How” You Pay)
• Single-Member LLC (Default: Disregarded Entity)
• Multi-Member LLC (Partnership)
• LLC Taxed as an S-Corporation
• LLC Taxed as a C-Corporation
• How Much Should You Pay Yourself?
• Payroll Setup Checklist (If You Run W-2 Payroll)
• Quarterly Estimated Taxes vs. Payroll Withholding
• Owner Basis, Distributions & Don’ts
• Quick Decision Tree
• FAQs

LLC Tax Classifications (Why They Control “How” You Pay)

“LLC” is a legal structure. For federal taxes, the IRS looks at your tax classification to determine how you’re paid:

• Single-member LLC (SMLLC): Default is a disregarded entity (reports on Schedule C with your Form 1040). You can choose corporate tax treatment by filing Form 8832 and/or Form 2553 for S-corp.
• Multi-member LLC: Default is taxed as a partnership (files Form 1065; owners get K-1s). You can elect corporate/S-corp treatment.
• LLC electing S-corp: Owners who work in the business are W-2 employees and must be paid a reasonable salary before taking distributions.
• LLC electing C-corp: Owners who work in the business are W-2 employees; profit retained in the company may be distributed as dividends.

Single-Member LLC (Default: Disregarded Entity)

How you pay yourself

You take an owner’s draw from business cash—no W-2 payroll and no “salary” to yourself. At tax time, you report profit/loss on Schedule C with your Form 1040, and you generally owe self-employment tax (Social Security + Medicare) on net earnings, usually via Schedule SE.

What to plan for

• Quarterly estimated taxes: Use Form 1040-ES to calculate and pay federal estimates.
• SE tax threshold: Owes if net SE earnings ≥ $400 (see IRS rules above).

Reference: IRS: Single-Member LLCs

Multi-Member LLC (Taxed as a Partnership)

How you pay yourself

• Owner distributions: Not wages; they’re draws of profit/capital.
• Guaranteed payments: If partners are paid for services or capital regardless of profit, those are guaranteed payments (deductible by the partnership; ordinary income to the recipient).
• Each member receives a Schedule K-1 from Form 1065 reporting their share of income, deductions, credits, etc.

References: IRS Pub 541 (Partnerships) and Instructions for Form 1065 (Guaranteed Payments)

LLC Taxed as an S-Corporation

How you pay yourself

• Working owners are W-2 employees and must receive reasonable compensation for services before taking any additional shareholder distributions.
• Wages are subject to payroll taxes; qualified distributions are not subject to FICA, but you must still run payroll correctly.

Key steps

• Elect S-corp status (if eligible) by filing Form 2553 on time.
• Run payroll, issue W-2, and file employment returns.

References: IRS: S-Corp Employees/Shareholders and IRS: Reasonable Compensation

LLC Taxed as a C-Corporation

Working owners are W-2 employees and typically get paid via payroll. Profits retained may later be distributed as dividends (which aren’t deductible by the corporation and may be taxable to the shareholder).

Elect corporate classification using Form 8832.

How Much Should You Pay Yourself?

Start with cash flow

• Create a simple monthly budget: revenue minus operating costs + taxes + savings = owner pay room.
• For S-corps, ensure your W-2 is reasonable for your role, market, time, and skills before distributions.

Cadence options

• SMLLC / Partnership: Monthly or twice-monthly draws aligned to profit and tax reserves.
• S-corp / C-corp: Standard payroll cycles (biweekly/semimonthly) through payroll software.

Payroll Setup Checklist (If You Run W-2 Payroll)

1. Get/confirm your EIN (and state payroll accounts).
2. Collect Form W-4 and I-9 for employees.
3. Withhold and deposit income tax and FICA correctly; see Understanding Employment Taxes and Employment Taxes.
4. File federal payroll returns (e.g., Form 941/940) and state equivalents on schedule.
5. Issue W-2 to employees by the January deadline.

Quarterly Estimated Taxes vs. Payroll Withholding

If you don’t run payroll (SMLLC/partnership draws), you typically make quarterly estimated payments using
Form 1040-ES. Estimates cover income tax and, when applicable, self-employment tax.

References: Self-Employed Tax Center • Estimated Taxes (IRS)

Owner Basis, Distributions & Don’ts

• Track basis: In partnerships and S-corps, distributions in excess of basis can create tax issues. Keep clean books and consult your CPA.
• Avoid commingling: Pay personal bills from a personal account; transfer owner draws to yourself instead.
• Document guaranteed payments (partnerships): Put terms in the operating agreement.
• For S-corps: Pay a reasonable W-2 before taking distributions.

References: IRS Pub 541 • IRS: S-Corp Compensation

Quick Decision Tree

1. What’s your current tax classification? (SMLLC / Partnership / S-corp / C-corp)
2. If SMLLC or Partnership: Use owner’s draws (and possibly guaranteed payments). Plan quarterly estimates.
3. If S-corp: Set a reasonable W-2 salary, then take shareholder distributions if cash flow allows.
4. If C-corp: Run W-2 payroll; consider dividends separately with your CPA.
5. Reassess annually: If profit and role change, revisit whether an S-corp election still makes sense. Use Form 2553 timing rules.

FAQs

Can a single-member LLC owner be on W-2?

Not in the default classification. SMLLC owners generally take draws. If you want W-2 wages, you must elect corporate status (and S-corp if desired) and then run payroll.

What is “reasonable compensation” for S-corp owners?

The IRS expects wages that reflect your role, time, skills, and market rates before distributions. Document your methodology (duties, hours, comps, revenue mix). See IRS guidance linked above.

Partnership vs. S-corp—what’s the practical pay difference?

Partnership members typically use draws and/or guaranteed payments and handle SE tax accordingly. S-corp owner-employees must run W-2 payroll and may then take distributions.

Do I still owe taxes if I didn’t take any draws?

Yes. Taxes are based on profits, not withdrawals. With pass-throughs, you may owe tax even if you leave cash in the business.

How often should I pay myself?

Pick a cadence that fits cash flow: monthly draws for SMLLC/partnerships; standard payroll cycles for S-/C-corps.