How To Pay Yourself With an LLC: Draw vs. Salary (2026)

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You can pay yourself from a limited liability company (LLC) through owner’s draws, wages, or distributions. How your LLC is taxed determines which methods you can use and how you report the payments.

You may owe tax on profits even if you leave the money in the business. For LLCs with pass-through taxation, owners pay income tax on their share of profits, whether they withdraw that money or keep it in the company.

This guide explains how your LLC’s tax treatment affects how you pay yourself as a business owner and which taxes you owe.

Understanding LLC tax treatment

The Internal Revenue Service (IRS) gives LLCs a default federal tax classification based on how many owners, or members, they have. One tax benefit of an LLC is that it can keep its default tax classification or elect corporate taxation.

Default tax treatment for LLCs

LLCs follow one of two default tax treatments:

• Sole proprietorship. If you’re the sole individual owner, you report the LLC’s income and expenses on your personal tax return. An operating business such as an online store uses Schedule C (Form 1040).
• Partnership. An LLC with two or more members is taxed as a partnership. The LLC files Form 1065 and gives each member a Schedule K-1. This shows the member’s share of income, deductions, and credits to report on their own tax return.

Owners under these classifications generally owe self-employment tax when their net self-employment earnings reach $400. The rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. You calculate this tax on 92.35% of your net business profit.

For 2026, the Social Security portion applies to the first $184,500 of your combined covered wages and net self-employment earnings. Medicare tax has no income cap. An additional 0.9% Medicare tax can apply above the income threshold for your filing status.

Some income is exempt from self-employment tax:

• Rental and investment income. If an LLC only holds rental real estate or investments, its rent, investment interest, dividends, and capital gains are generally exempt. Exceptions include real estate dealing and rentals with substantial services for tenants, such as hotel-style accommodations. The IRS notes these exceptions in its Schedule SE instructions.
• Income received by qualifying limited partners. A member who performs no services for an LLC taxed as a partnership may qualify for the limited-partner exception, though the law is unsettled for LLC members..

Qualifying members generally pay no self-employment tax on their share of ordinary business income. Guaranteed payments for services, which are payments determined independently of business profits, are subject to self-employment tax. Have a tax professional review your ownership rights and role to confirm whether you qualify.

Electing corporate taxation

Single-member and multimember LLCs can choose C corporation or S corporation taxation. LLCs and corporations are different legal business structures. An LLC that elects corporate taxation keeps its LLC status under state law.

S corporation taxation

An LLC that meets the S corp requirements can elect S corp status by filing Form 2553, Election by a Small Business Corporation. Filing a valid election on time generally also establishes the LLC’s corporate tax classification.

The IRS’s eligibility rules require the business to:

• Be formed in the United States and eligible for corporate taxation
• Have 100 or fewer shareholders; certain family members can count as one shareholder under IRS rules
• Have only eligible shareholders, including US citizens or US tax residents, estates, certain trusts, and qualifying tax-exempt organizations
• Have one class of stock; each share must carry the same rights to distributions and to assets distributed when the business closes; voting rights may differ
• Not belong to an excluded business category: certain financial institutions, insurance companies, and current or former domestic international sales corporations.
• Use a permitted tax year, such as the calendar year
• Get every shareholder’s consent to the election

S corporation income generally passes through to owners’ personal tax returns. Owners who work in the business must receive reasonable compensation before taking nonwage distributions. Their wages are subject to payroll taxes. Properly classified shareholder distributions are exempt from payroll and self-employment taxes.

Owners report their share of profits, including profits kept in the business. Cash distributions other than dividends are generally tax-free up to your stock basis. This is your investment adjusted for business income, losses, and earlier distributions.

Amounts above your stock basis generally create a taxable capital gain. Special rules apply if the business has retained earnings from a period when it was taxed as a C corporation.

C corporation taxation

An LLC chooses C corporation taxation by filing Form 8832, Entity Classification Election. The business pays federal corporate income tax on its taxable profits. Owners who work as employees can receive wages subject to payroll taxes.

When the business distributes its earnings and profits, shareholders receive taxable dividends. The business pays tax on its profits, and shareholders pay tax on the dividends they receive.

These two levels of tax are called “double taxation.” Qualified dividends are taxed at lower capital gains rates.

Some distributions qualify as a return of capital, meaning they return part of your investment. These reduce your stock basis. Amounts above that basis are generally taxed as capital gains.

How to pay yourself with an LLC

• Single-member LLCs taxed as sole proprietorships
• Multimember LLCs taxed as partnerships
• LLCs taxed as S corporations
• LLCs taxed as C corporations

Your LLC’s federal tax classification determines how you can pay yourself:

• Owners of LLCs taxed as sole proprietorships take draws.
• Members of LLCs taxed as partnerships can receive distributions and guaranteed payments.
• S corporation or C corporation owners who work in the business receive wages through payroll and may also receive distributions or dividends.

The table explains the federal forms individual owners use when filing business taxes for an LLC that runs an operating business. Payroll and state tax filings may also apply.

To decide how much to take, calculate your personal expenses and taxes. Then check how much cash the business needs for inventory, bills, debt payments, and a reserve for unexpected costs. For owners on payroll, the salary must also reflect the work performed.

Budget for planned growth spending, too. In Shopify’s Q4 2025 Survey of Store Owners, 79% said they use profits to self-fund growth. Set aside money for planned purchases or hiring before deciding how much profit to withdraw.*

Use Shopify’s finance reports to review sales, payments, and gross profit. In Shopify admin, go to Analytics > Reports and filter the category to Finances. Review these reports along with your bookkeeping records to account for other expenses and upcoming payments.

Single-member LLCs taxed as sole proprietorships

An owner’s draw is the default way to pay yourself from a single-member LLC taxed as a sole proprietorship. You transfer money from the business to your personal account.

You report business profit on Schedule C and calculate self-employment tax on Schedule SE. Income tax applies to profit whether you withdraw the money or leave it in the business. For example, if your store earns $60,000 in net profit and you take a $30,000 draw, you still report $60,000 in business profit.

Use this three-step process:

1. Transfer the money. Move the amount you’ve budgeted from your business account to your personal account. If you use Shopify Balance, transfer funds to a connected bank account through Shopify admin. Keep your business and personal finances separate so you can easily find each owner’s draw in your records.
2. Record the owner’s draw. Categorize the transfer as an owner’s draw in your bookkeeping. It reduces your ownership balance, or equity, in the business. Draws are personal withdrawals and have no effect on taxable business profit.
3. Set a draw schedule. Choose a regular schedule, such as twice a month. Review available cash before each transfer and adjust the amount when sales or business expenses change.

Set money aside for estimated tax payments. Individuals need these payments when they expect to owe at least $1,000 after withholding and credits, subject to IRS exceptions.

Use Form 1040-ES to estimate income and self-employment taxes and work out the required payments. The IRS divides the year into four payment periods, each with its own deadline. State estimated payments may also apply.

Multimember LLCs taxed as partnerships

Partnership is the LLC’s federal tax classification. The business stays an LLC under state law. Members who perform services for the business are self-employed and can’t receive W-2 wages from the partnership.

Members can receive money in two main ways:

• Distributions. Transfer money according to the LLC’s operating agreement, which sets out members’ rights to profits and payments. Record each withdrawal against the receiving member’s equity.
• Guaranteed payments. The LLC can pay a member for services based on an amount determined independently of business income. The member reports these payments as ordinary income. The LLC deducts payments that qualify as business expenses, while certain costs must be recorded as capital expenses. Guaranteed payments are not subject to income tax withholding.

The main tax requirements are:

• Income tax. The LLC files Form 1065 and provides each member with a Schedule K-1. Members report their share of income, deductions, and credits on their personal returns, including income retained by the business.
• Tax on distributions. Cash distributions generally reduce your tax basis in the LLC, which is your investment adjusted under tax rules. Cash above that basis can create a taxable gain.
• Self-employment tax. Your treatment can depend on your role and whether you qualify for the limited-partner exception. Members outside that exception generally owe self-employment tax on their share of ordinary business income and guaranteed payments. Qualifying limited partners owe it only on guaranteed payments for services. Have a tax professional confirm how the rules apply to each member.

LLCs taxed as S corporations

An eligible LLC elects S corporation taxation by filing Form 2553. Owners who work in the business must receive reasonable compensation for their services before taking nonwage distributions.

The difference between an LLC and an S corp is that an LLC is a legal business structure, and an S corp is a federal tax classification.

S corporation taxation can reduce employment taxes when the business earns profit beyond the owner’s reasonable wages.

To assess the overall savings, account for payroll services, tax preparation, and state business taxes. Some states, including California, tax S corporations at the business level.

The IRS assesses reasonable compensation using factors such as:

• Your qualifications and work experience
• The tasks you handle and time you spend working
• Pay for similar work at comparable businesses
• Wages and bonuses paid to other employees
• The company’s distribution history and any pay agreements or formulas

Keep records of your duties, hours, and the salary information used to set your pay. As an owner-employee, complete Form W-4 and receive your wages through payroll. The LLC must:

• Withhold federal income tax and the employee’s Social Security and Medicare taxes
• Pay the employer’s share of Social Security and Medicare, plus applicable unemployment taxes
• Deposit payroll taxes on the required schedule
• File employment tax returns, generally Form 941 quarterly and Form 940 annually when required
• Issue a W-2 and file the required wage information with the Social Security Administration

The LLC also files Form 1120-S and gives each owner a Schedule K-1. Owners report their share of business income even when profits remain in the company.

Nondividend distributions are generally tax-free up to the owner’s stock basis, with amounts above that basis generally taxed as capital gains. You may need to make estimated payments to cover tax on income outside payroll.

LLCs taxed as C corporations

Owners who work for an LLC taxed as a C corporation are treated as employees and receive W-2 wages. The LLC can also pay shareholders dividends from its after-tax profits.

Owners who only invest in the business may receive dividends without a salary. Under IRS rules for corporate officers, an officer is treated as a nonemployee if they perform no services or only minor services and neither receive nor are entitled to receive any pay. Both conditions apply.

The main tax requirements are:

• Corporate income tax. The LLC files Form 1120 and pays tax on its taxable profits.
• Wages. Reasonable pay for work performed is generally deductible by the business. The LLC handles wage withholding, employer payroll taxes, employment tax returns, and W-2 reporting.
• Dividends. Shareholders report taxable dividends on their personal returns, using the amounts on the Form 1099-DIV the LLC issues. The company pays tax on its profits, and shareholders pay tax on the dividends they receive.

*Based on a 2025 survey of 500 Shopify merchants conducted in English across Australia, Canada, the United Kingdom, Ireland, New Zealand, and the United States. Respondents were established merchants with more than two years on the platform. Results reflect the experiences of this specific sample and may not be representative of all merchants.