How to Pay Yourself from Your LLC (the Right Way)
Learn the proper ways to pay yourself from your LLC. Understanding distributions, salaries, and tax implications can save you thousands.
Understanding LLC Payment Methods
Owner's Draw (Distributions)
The most common way for single-member LLCs to pay themselves. You take money out of your business account as needed.
- No payroll taxes (self-employment tax only)
- Flexible timing and amounts
- Simple to implement
- No W-2 required
Salary (W-2 Employee)
Treating yourself as an employee of your LLC. More complex but can offer benefits and retirement options.
- Regular paycheck and benefits
- Easier to get business loans
- Retirement plan options
- More professional appearance
How to Take Owner's Draws (Step-by-Step)
Set Up Proper Business Banking
First, ensure you have a separate business bank account. Never mix personal and business finances.
Requirements:
- • Separate business checking account
- • Business debit card
- • Clear separation from personal accounts
- • Proper record keeping
Determine Your Draw Amount
Calculate how much you can safely take out without hurting your business operations.
Considerations:
- • Business cash flow
- • Operating expenses
- • Emergency fund needs
- • Tax obligations
Best Practices:
- • Keep 3-6 months of expenses
- • Take regular, consistent amounts
- • Document all transfers
- • Plan for quarterly taxes
Transfer and Document
Transfer money from your business account to your personal account and keep proper records.
Transfer Methods:
- • Bank transfer (ACH)
- • Business debit card
- • Check from business account
- • Wire transfer (for large amounts)
Documentation:
- • Record date and amount
- • Note purpose as "owner's draw"
- • Keep bank statements
- • Update your books regularly
Tax Implications of Owner's Draws
Self-Employment Taxes
You'll pay self-employment taxes (15.3%) on your net business income, regardless of how much you draw.
- • 12.4% for Social Security (up to limit)
- • 2.9% for Medicare (no limit)
- • Due quarterly with estimated taxes
- • Based on net profit, not draw amount
Income Tax
Your draws are not additional income for tax purposes. You're taxed on your business's net profit.
- • Taxed on business net income
- • Draws don't affect tax liability
- • File Schedule C with 1040
- • Consider quarterly payments
Salary vs Owner's Draw: Which is Better?
Owner's Draw Advantages
Tax Benefits:
- • No payroll taxes
- • Simpler tax filing
- • More cash flow flexibility
- • Lower administrative costs
Operational Benefits:
- • No payroll processing
- • No W-2 forms
- • Flexible timing
- • Easier to manage
Salary Advantages
Business Benefits:
- • Easier to get business loans
- • More professional appearance
- • Better for multiple members
- • Clear income documentation
Personal Benefits:
- • Regular paycheck
- • Employee benefits eligibility
- • Retirement plan options
- • Better for mortgage applications
Common Mistakes to Avoid
Tax Mistakes
- Not paying quarterly estimated taxes
- Thinking draws are tax-free
- Not keeping proper records
- Mixing personal and business funds
Business Mistakes
- Taking too much money out
- Not maintaining business reserves
- Inconsistent draw amounts
- Not planning for slow periods
Best Practices for Paying Yourself
Maintain Separation
Always use separate business and personal accounts. Never mix funds or use personal accounts for business expenses.
Plan for Taxes
Set aside money for quarterly estimated taxes. Aim to save 25-30% of your net income for taxes.
Keep Good Records
Document all draws with dates, amounts, and purposes. Use accounting software to track everything.
How Start With Genie Helps You Set Up Proper Payment Systems
Complete Setup
We provide guidance on setting up proper business banking and payment systems for your LLC.
Tax Guidance
Our resources help you understand tax implications and set up proper payment structures.
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