How to Pay Yourself from Your LLC: Owner's Draw vs Salary

If you have an LLC or you're about to start one, one of the first questions you're going to have is, "How do I actually pay myself?" Like, the money is sitting in your business bank account. Can you just transfer it to yourself? Do you need to set up payroll? Are you going to get in trouble with the IRS if you do it wrong? My name is Charlie. I've been running multiple LLC's for many years now, and

I remember when I first started, this stuff was super confusing. Literally, no one explains it in plain English. So, in this video, I'm going to break down the exact ways you can pay yourself from your LLC, which method is right for you depending on your situation, and also show you guys the tools that I use to run my own payroll. Honestly, picking the right method can save you thousands of dollars per year in taxes or more.

So, I'm really excited for this video because it can make a huge impact on how you run your business. And yeah, we're going to clear everything up in this video. If you stay until the end, you'll know exactly how to pay yourself properly. By the way, I have a completely free LLC consultation guide. It's basically just a Google doc that you guys can read through, completely free, and I'll link that down below. It goes into my

recommendations for how to actually set up your LLC if you guys don't already have one. Okay, so first, there are only two main ways LLC owners can pay themselves. First is owner's draw and then the second is salary. So, the one that you choose depends on how your LLC is taxed. And most beginners don't realize that you can actually have a choice here. For owner's draw, you basically just transfer your money from your business account to

your personal account. If you currently don't have a business account, then the money is just in your personal account already. So, you literally don't need to do anything. But, I definitely do recommend having a business bank account. Again, if you guys check out that LLC consultation guide, I'll have all my recommended business banks there. Yeah, in this case, for owner draw, you're just taking the money, transferring it to your personal account. It's really that simple. And

this is what most single member LLC owners do. In this case, there's no payroll taxes withheld at the time of transfer. So, you're still responsible for paying taxes. You just handle it yourself through quarterly estimated payments or your CPA does it once per year. Now, the other way you pay yourself is through salary. You basically you put yourself on payroll and you pay yourself a regular paycheck just like an employee. When you do this, taxes get

withheld automatically. So, they withhold federal income tax, social security, Medicare, as well as potentially state tax. And this is required if your LLC is taxed as an S corporation or a CC corporation. With payroll, there's a bit more structure. There's more paperwork, but it's also, of course, a bit more predictable. So, a simple way to explain the differences is owner's draw is like being your own freelancer. Then salary is like being your own employee. Here's the

thing that most people don't understand, and that is the way your LLC is taxed changes everything. So, your LLC is not a tax classification. I got to say this again. Your LLC is not a tax classification. It's just a legal structure. The IRS, they let you choose how it gets taxed. Now, by default, a single member LLC, which is probably what most of you guys have, is taxed as a sole proprietorship. What this means is that

all profit flows through to your personal tax return, your schedule C, automatically, and then you pay income tax and self-employment tax, which is currently 15.3% on all of your net profit. In this scenario, you're going to be paying yourself through owner's draws, right? You're literally just transferring the money from your business bank account to your personal account. It's the most simple way of paying yourself. And again, this applies to single member LLC's that are taxed as

a sole proprietorship. Now, a couple numbers you need to be aware of right here. First is 15.3%. So, this is the like dreaded self-employment tax that no one really wants to pay. It adds up to quite a bit. 12.4% 4% for social security and then 2.9% for Medicare. And yeah, again, it can add up to a lot of money. For anyone that's starting out their business who doesn't have much profit, this is probably how you're going

to be taxed just through owners draws where you just transfer money from your business bank account to your personal bank account. Now, if you have a multimember LLC, the default is that it is taxed as a partnership. So, profits are split according to the operating agreement. Let's say you have another business partner, the profit will be split 50/50 and then each member pays self-employment tax on their share. Again, this is also for multi-member LLC's that don't

have that much profit that are probably just starting out. Now, most business owners will go through this phase where they start off being taxed as a sole proprietorship. And the great thing is that payroll is super super simple, right? You're just paying yourself transferring money from your business account to your personal account. After a while though, it's going to make sense for you to tax your LLC a little bit differently and treat it as an escorp

election. This is a huge tax strategy that a lot of people surprisingly don't know about. And so I'll see people with single member LLC's that make, let's say, $150,000 in profit, but they're not paying themselves payroll. They're only taking owner draws. This is bad because you're paying that 15.3% self-employment tax on your entire profit. So 15.3% of 150k. It's a lot of money. This brings us to the escorp election. And I know this is going to

sound a little bit confusing, but please hear me out. It's very, very important that you guys understand this. Essentially, what you can do is with your LLC, you can file form 2553 with the IRS to elect SC Corp taxation. You're saying, "Okay, treat my LLC as an S corporation." And when you do this, you essentially are going to pay yourself a salary and also take the rest as distributions. The salary is going to be like a

W2. So you're essentially an employee of your own company. And then the rest you're going to take as distributions, which is essentially just transferring money into your bank account. Now, in this case, distributions are not subject to that 15.3% self-employment tax. Only the payroll amount is. And so you might be thinking, okay, why would I pay myself payroll? Why can't I just take everything as that distribution where I don't pay the self-employment tax? Now, there's this

thing called reasonable salary. And this is super super important. When you go this route, you need to take a reasonable salary. You can't just say, "My salary is zero. I'm only taking distributions because the IRS knows that that's going to save you a lot on taxes." And so, what you need to do is you need to choose a reasonable salary to pay yourself. The amount that you choose, it's really going to depend. I recommend just talking

to your CPA to come up with a number. It depends on how much money you're making, how much net profit you have, as well as your involvement in the company. Now, you might be wondering, when should I choose to have this escorp election? My rule for this is after $50,000 in net profit, you're likely going to come ahead and save a little bit money on taxes by going this route. The more money you make, the more

it makes sense. But for anyone making under $50,000 net profit, you don't need to do this escort election. It's a little bit more complicated to have to run payroll. Just take owner's draws. You'll pay the 15.3% on all the profit, but you won't save any money going this other route. So, it's just going to save you a lot of headache. I do want to say I'm not a financial adviser. I'm not a CPA. Don't take this

as financial advice, but for most people, like once you're making above $50,000 in net profit, the benefits of setting up payroll and taking these distributions are going to make sense. So, let's go over an example. Let's say your LLC makes $120,000 in profit. So, without this escorp election, you're going to pay about $18,000 in self-employment tax on all of it. Now, if you elect to have it taxed as an escorp, let's say you choose to pay

yourself a $60,000 reasonable salary. In this case, we're paying that 15.3% on this $60,000 salary portion. That is about $9,000 give or take. And then the other $60,000 comes to you as a distribution with no self-employment tax. So, in this case, we're only paying $9,000 in self-employment tax. Whereas, if you didn't have this escort election, you'd be paying that 15.3% on the full 120K, which is about $18,000. So, in this case, we're saving $9,000. The extra

cost of running payroll and filing an escorp return probably aren't worth it if you're not making over, let's say, $50,000 in net profit per year. Now, let's dive a little bit more into this whole reasonable salary thing. You need to pay yourself a reasonable salary. And this is basically what someone in your role would actually get paid. So you can't pay yourself, let's say, $10,000 and take 110K in distributions. The IRS is going to flag that.

Just talk to your CPA, figure out a number that both of you guys are comfortable with. So now that you know the options, let me walk you through exactly how to set each one up. Okay, so for standard LLC's that have not yet made the escort election, which is most people starting out, the first thing you're going to do is open up a separate business bank account. If you already have one, then that's awesome. But if

you don't, I really recommend setting up a separate account because you don't want to co-mingle your personal and business funds. There's tons of reasons why, but I'm not going to get into that in this video. If you want to take your business seriously, don't run business money through your personal checking account. I use a bunch of different business bank accounts. Currently, my favorite is Mercury. I'll have a few of my favorites down below that you guys

can check out, and I do believe some of them are running some like bonuses if you actually do use my link. Step two is decide on a payment schedule. Decide if you're going to pay yourself weekly, bi-weekly, monthly. Pick whatever works for you. Of course, you don't have to do this. You can just choose to pay yourself whenever, but I do think being consistent helps with budgeting. And it also looks better if you ever get audited.

So, back in the day, I was paying myself every 2 to 4 weeks. Okay, step three is to transfer your money from your business to your personal account. So, you can do this by either writing a check, you can do an a transfer, or you can use your bank's transfer feature. This is super super easy. And after that, you're going to want to label it as an owner's draw in your bookkeeping. Step four is to, of

course, set aside money for taxes because once you transfer the money, don't think it's all yours to spend. You still need to pay taxes on that money that's now in your personal account. Set aside a portion of it. Maybe create a different account for that. Just be aware you haven't paid the taxes yet. You're going to need to pay the taxes on that money. I recommend putting away 25 to 30% for every time you pay yourself.

Some people do 30 to 40% just to be safe. And it also depends on your tax bracket as well as your state. Step five is pay quarterly estimated taxes. Now, you don't have to do this, but I do recommend doing it to avoid some penalties. And the due dates are April 15th, June 15, September 15th, and January 15th. So, if you pay your estimated taxes on those four dates, there won't be any penalties. You might even

get a tax refund. How much you pay in estimated taxes is going to depend on what number your CPA comes up with. If you're using like Turboax, they're also going to be able to estimate that for you based on how much you paid last year. Or you can use IRS form 1040ES to calculate this amount. Okay, so now we've talked about how to do owner's draw if you have a relatively newer business that's making, let's say,

under $50,000 in profit per year. Now, let's talk about how to actually set up the salary method with the escorp election. Step one for this is you're going to file form 2553 with the IRS. When you do this, you're electing SC corporation taxation for that LLC. And this must be filed by March 15th of the tax year or within 75 days of forming your LLC. Now, like I mentioned, you're going to want to consult with someone

to see if this is a good idea. If you have a CPA, talk to them. You can also use AI to, you know, give a pretty solid answer. I don't want you guys just to do this because you saw it on this video. Make sure that it actually makes sense. Filling out this form is super, super simple, very easy to do. And then that brings us to step two, which is to determine your reasonable salary amount.

So you're going to want to basically look at what someone else doing your job would normally get paid in your area. And what I would recommend doing is you can go to a few different websites like the Bureau of Labor Statistics and go to Glass Door. And what I'll say is like there is sort of a general rule of thumb for what makes sense. 30 to 50% of your net profits is likely going to be what

you're paying yourself reasonably. But of course, it also varies by industry. I've talked to a lot of business owners and from what I've seen, it's usually it falls between 30 to 50%. Now, if the profits are super super high, then it might drop down a bit. Like, let's say you are making $2 million in net profit in your business, well, you probably aren't going to be paying yourself a million dollars in salary. It's probably going to

be less. Once you've come up with a number, then you're ready to set up payroll. And yeah, that is step three. So, you're going to need a payroll service to handle withholdings, tax filings, as well as W2s. There are tons of payroll platforms you guys can use. I personally use Gusto right now. It's my favorite one. I'll have a link down below if you guys want to set up a free account. Now, when you set up

your Gusto account or whatever software you're using, you're going to run payroll on a regular schedule. And usually, it's bi-weekly or monthly. So, let's say every month you have $5,000 in payroll going out to yourself. After that payroll is paid, any remaining profits can be taken as distributions. You don't have to actually do that transfer, but it's still going to be counted as distributions. A little bit confusing, but basically what that means is even if you

don't take the money out of your business bank account, you're going to get taxed on it. So, what I like to do is most profit I'll take it out and I'm going to invest it, put it into an account for taxes. Because if it's just sitting in your business bank account, it's going to get taxed anyways. It's probably not making any money, so you might as well invest it. The great thing with these transfers is that

they are not subject to that self-employment tax. So, you're saving a good amount of money on that. Okay, step five is to file the right tax forms. When you do this escort election, you're going to need to fill out form 1120S annually. This is a different form than if you just have a standard LLC. And it is a bit more complex. So, once you go this route, I definitely recommend having a CPA. It's probably not going

to be worth your time to try and figure out tax yourself. Rather, I think you should just focus your time and energy on building your business, growing your income, and just let someone else with experience doing all this do it for you. Okay, so those are all the steps. I'm just going to show you quickly what this looks like within Gusto. Now, if you guys use my link down below and set up a free account, you're

going to be able to choose between the different plans. If it's just you paying yourself, the Gusto solo plan is going to be perfect. If you do have team members, then you're going to want to get one of the other plans. So, this is the dashboard for my Gusto account. This is what I use to pay myself from this particular company. I've used a lot of payroll softwares. This is by far the easiest UI to use

and it's also the easiest to set up. So that's why I just recommend it to any of my friends that ask me. If you click on people, you'll see the people in your company that are on payroll. So for me, it's just me, right? If you want to add people, you'll click on this button right here. Adding a person is also pretty simple. It's just a very straightforward set of things you need to put in. If

you come here to the pay tab, this is where you're going to be able to pay your employees. So you can check out the payroll calendar. As you can see, I am paying myself twice per month on the 15th and also the last day of the month. You can also pay more people here. For example, if you want to pay a US contractor, you can click on this one. Under pay history, this is where you can

see all the different payrolls that you've run. Every about 2 weeks, I'm sending a certain amount in payroll to my personal account. It's coming from my business account right here. And these are all complete. And this one is still in progress. Okay. So, this is a payroll summary. and it's basically going to break down all the taxes that are paid. So, it has company taxes, employee taxes, and the great thing is like Gusto, it handles all

the stuff for you. I do not recommend trying to pay payroll on your own because it is very, very complex. There's all these different little line items. They're always changing amounts, so definitely don't try and do this yourself. It'll show you the direct deposit, so what actually hits your personal account, as well as the total taxes that you are paying right here. Now, I've set this up to where it's just a direct deposit. You can also

choose to have it mail you a check every payroll cycle, but I think the direct deposit is way better. If you're setting up your payroll for the first time, I'd say you probably are going to spend between 15 to 30 minutes on that first setup process. Essentially, what you're going to be doing is setting your pay rate, your pay schedule. It's going to be asking you a lot of questions about your business as well as you,

the employee. Yeah, it just takes a little bit of time. This is something that you need to go through anyways while setting up payroll. And trust me, it's a lot faster on Gusto than it is on a lot of other platforms. Now, after I run payroll from this company to myself, there is extra money. So, any of that extra money, I just do a direct transfer from my business bank account to my personal account. Okay. Now,

I want to talk about five really quick mistakes that a lot of people make when they pay themselves from their LLC. So, first is they don't separate business and personal finances. We talked about this already, but it's really important. You want to have separate bank accounts because if you don't, you're piercing the corporate veil and you're probably going to lose your liability protection. That's a huge reason why you want to have LLC's in the first place.

Mistake number two is you forget to pay quarterly estimated taxes. I've definitely done this in the past and when this happens, you are charged penalties. So, put reminders in your calendar for April 15th, June 15th, September 15th, and January 15th, and pay these taxes. Now, I've also seen people not pay their estimated taxes. invest the money instead and try to bank on having a higher return investment from the investments. Yes, you can try that. It is

more risky, but I will say the penalties that the IRS are currently charging are getting kind of high due to rising interest rates. So, definitely keep that in mind. Mistake three is setting your escort salary too low. So, if you're paying yourself, let's say, $15,000, but you're doing 200k in net profit, then the IRS is probably going to be suspicious of that. That might set yourself up for an audit. So, definitely pay yourself something reasonable. And

this is a bit more complicated, but make sure you're taking the proper QBI deduction. So, there's going to be an exact salary amount for some people where it actually makes sense to pay a little bit more in salary to take a higher QBI deduction, but I'm not going to get into that in this video. Mistake four is not keeping records for every single transfer that you make. Make sure you log it. Make sure it's in your

accounting software. And then mistake number five is a lot of people, they just wait way too long to talk to a CPA. So, I truly believe that having a good CPA pays for themselves. They catch things that you don't even know about. And if you find a good one, they're going to save you way more than their fee. And don't wait until the last minute because every tax season, every CPA gets super super busy. They're not

going to give you the attention that you probably want. And so definitely start talking to a CPA, I'd say, 3 to 6 months before your return is due. Okay, so let's break down everything that we talked about in this video. Here's the very, very quick version. If you are a single member LLC making, let's say, under $50,000 in profit per year, just keep it simple. Don't just do owner's draws. Transfer money from your business account to

your personal account. Set aside 25 to 30% for taxes. Pay your quarterly estimated taxes and you're good. If you're making more than that and you want to save on the self-employment taxes, talk to your CPA, maybe do an escort election, set up your payroll through something like Gusto. Pay yourself a reasonable salary and then take the rest as distributions. And no matter what you guys do, have separate bank accounts, track everything, and then pay your taxes

on time. So yeah, I know this is one of those topics that sounds a little bit more complicated than it actually is. It does take some time to set up payroll if you do want to go that route. But the good news is like once you set it up, it just runs on autopilot. So I don't manage my gusto account. It just runs the payroll for me. And the only manual thing I have to do is

the distributions to do those transfers myself. Hopefully you guys found this video helpful. Again, I'll have all the resources we talked about in this video in the description down below. Take advantage of that LLC consultation guide. It's super super helpful. And of course, I'll have that gusto link down as well. If you got any value from the video, make sure to hit that like button, subscribe on my channel. I have a bunch of other content about

entrepreneurship, finance, business, AI, and my whole goal of the channel is to help you guys live a financially successful life. That's what I nerd out to, and hopefully you guys do, too. All right, thank you so much for your time again, and I'll see you in the next video. Peace.