How to Pay Yourself From an LLC: The Ultimate Guide for 2023

Maximizing your financial success as an LLC owner means understanding how to pay yourself legally and efficiently. With Better Accounting Solution's easy-to-follow guide, you can ensure compliance with the law and optimize your pay structure for future success an growth.

Congratulations, you've started your own business and formed an LLC! You're now a proud owner of a legal entity that separates your personal assets from your business assets, providing a shield of protection for your personal finances. 

As a business owner, it's important to know how to pay yourself from your Limited Liability Company (LLC). After all, the profits of an LLC are typically passed through to the members, and it's up to you to determine how you want to receive your share. In this article, we'll go over the basics of paying yourself from an LLC and provide tips for staying compliant with the law.

What is an LLC, and why is it important?

Before we delve into how to pay yourself from an LLC, let's first define what an LLC is and why it is important. A Limited Liability Company is a legal entity that separates your personal assets from your business assets, protecting your personal assets from business liabilities. LLCs offer several benefits to business owners, including pass-through taxation, flexibility in management, and limited personal liability.

Related: Independent Contractor Taxes: Deductions, Credits, and Forms Explained

Different Ways to Pay Yourself from an LLC

As an LLC owner, you have several options for paying yourself. The most common methods are:

1. Owner's Draw

The owner's draw method involves taking money out of the LLC's profits or equity as needed. This method is the simplest and most flexible way to pay yourself, and it is tax-efficient since it does not incur payroll taxes. However, it is essential to keep accurate records of all draws and ensure that the LLC has sufficient profits or equity to cover them.

Related: What You Need About Taxes for an S-Corp

2. Salary

Paying yourself a salary is another common method for LLC owners. It involves setting up a payroll system and paying yourself a regular salary, just like any other employee. This method has the advantage of being predictable and tax-efficient since payroll taxes are deductible expenses for the LLC. However, it can be more complicated to set up and maintain than the owner's draw method.

3. Guaranteed Payments

Guaranteed payments are fixed payments made to LLC members, regardless of the LLC's profits or losses. This method is similar to a salary but does not involve setting up a payroll system. Guaranteed payments are tax-deductible for the LLC but are subject to self-employment taxes for the member.

Tax Implications of Paying Yourself from an LLC

The tax implications of paying yourself from an LLC depend on the payment method you choose. Owner's draws are not subject to payroll taxes or income taxes, but they reduce the LLC's profits and may affect the LLC's tax liability. Salaries and guaranteed payments are subject to payroll taxes and income taxes, but they are tax-deductible expenses for the LLC.

Related: Don't Miss a Deadline: Everything You Need to Know About 2023 Tax Filing and Extensions

It's important to get assistance from a tax expert, such as Better Accounting Solutions, to make sure that you are paying yourself legally and effectively. You can maximize your tax deductions, prevent tax fines, and make sure you are following the rules to all legal guidelines for paying yourself out of an LLC by seeking the advice of a tax expert. To ensure that the pay structure of your LLC is optimized for your financial success, be sure to seek advice from a qualified tax professional.

Related: Top 15 Tax Deductions and Write-Offs for Self-Employed 1099 Entrepreneurs

Best Practices for Paying Yourself from an LLC

To ensure that you are paying yourself legally and efficiently from your LLC, follow these best practices:

  • Keep accurate records of all payments and transactions.
  • Consult with a tax professional to determine the best payment method for your business and to ensure compliance with tax laws.
  • Set up a separate business bank account to track income and expenses and to separate personal and business finances.
  • Consider setting up a formal payroll system to ensure compliance with tax laws and to simplify payment processing.
  • Regularly review your LLC's financial statements to ensure that it has sufficient profits or equity to cover payments.

It can be difficult to pay yourself from an LLC, but with the right assistance, you can easily navigate the legal and tax impacts. Consult with Better Accounting Solutions a tax expert when deciding on your payment options, such as salaries or distributions, to make sure you are taking full advantage of any available deductions and avoiding any penalties. 

You can create a productive pay structure for your LLC that will help you stay in compliance with the law and succeed financially by following the advice and suggestions provided in this detailed solution.

We’re so happy you found this article informative! Head back to our blog page to learn more tips, tricks, and guidance on accounting to maximize your business’s growth and development. 


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