How to Pay Yourself from Your LLC or S Corp
One of the most confusing parts of running a business is figuring out how to pay yourself.
Should you take a draw? Should you run payroll? Does it change your taxes?
The answer depends on whether you’re an LLC or an S Corp, and choosing the wrong method can cost you thousands in taxes or trigger an IRS issue you never saw coming.
Here’s the simple version every business owner should know.
How Owners Get Paid in an LLC
An LLC is flexible. The IRS lets you choose how it’s taxed, but if you don’t make an election, you’re treated as a sole proprietor (if you’re the only owner) or a partnership (if there are multiple owners).
In both cases, you’re paid through what’s called an owner’s draw.
What is an owner’s draw?
An owner’s draw is when you transfer money from your business bank account to your personal account.
You don’t run payroll. You don’t issue yourself a W-2.
It’s simple. Just move the money and track it properly in your books.
How taxes work for LLC draws
Here’s where people get confused.
Even though you “take a draw,” you’re still taxed on the profit of the business, not the amount you take out.
Example:
If your business earns $100,000 in profit and you only take out $40,000, you’re taxed on the full $100,000.
This is why bookkeeping matters. The IRS taxes profit, not cash withdrawals.
How Owners Get Paid in an S Corp
If your LLC elects S Corp status, everything changes.
You can no longer take simple owner’s draws without running payroll.
You must pay yourself a reasonable salary
The IRS requires all S Corp owners who work in the business to take a W-2 salary.
This salary must be “reasonable” for your role, which means confident and defendable if the IRS ever asks.
After your salary, you can take distributions
Once your salary is set, you can take extra profit out of the business as owner distributions.
These are not subject to self-employment tax, which is where the savings come from.
Why people choose the S Corp
Because part of your profit is paid through distributions instead of wages, you avoid payroll taxes on that portion. This often saves business owners thousands of dollars each year, as long as their income is stable and high enough to justify the extra compliance.
Example:
Your business profits $120,000.
In an LLC, you pay self-employment tax on the entire $120,000.
In an S Corp, you might pay yourself an $80,000 salary and take $40,000 in distributions.
You save thousands because only the salary portion is subject to payroll taxes.
How Much Should You Pay Yourself?
LLC owners
Pay yourself whatever makes sense for your personal budget. Just remember you’re taxed on the business profit, not the draw.
S Corp owners
You must set a “reasonable salary.” This depends on:
Your role in the business
Your industry
Your experience
How much similar positions typically earn
After your salary, you can take remaining profits as distributions.
Common Mistakes to Avoid
Here are the issues that cause IRS problems or tax surprises:
Paying yourself nothing in an S Corp
Paying yourself too low of a salary
Mixing personal and business accounts
Forgetting payroll taxes for S Corp wages
Assuming draws reduce taxable income (they don’t)
Clean, consistent bookkeeping prevents most of these mistakes.
Which Method Is Best for You?
If your business is still new or profits are up and down, an LLC with simple draws is usually fine.
If your business has steady profits and you’re earning at least seventy to one hundred thousand dollars a year, an S Corp might save you a meaningful amount in taxes.
The right choice depends on your income, your structure, and whether you want the extra administrative steps that come with an S Corp.
Final Thoughts
Paying yourself shouldn’t be stressful. Once you understand how LLC draws and S Corp salaries work, the process becomes clear and predictable.
If you want help choosing the right method or setting up clean records so your payouts are always correct, Red Leaf Bookkeeping is here to help.
👉 Book a free Money Clarity Call and get clarity on how to pay yourself the right way.