Do I Own an LLC or an S Corporation? Here's How You Should Pay Yourself Correctly

A Question From a Client

This week, during a meeting with a client, they asked me a question I hear all the time:

"Since I own my business, do I need to put myself on payroll, or can I simply transfer money to myself whenever I need it?"

It's an excellent question.

Many business owners assume that simply having an LLC means they must pay themselves a salary. The reality is that it all depends on how your business is structured and how it is taxed.

It All Depends on How Your Business Is Taxed

The way you pay yourself isn't determined just by having an LLC. The most important factor is how your business is treated for federal tax purposes.

Single-Member LLC

If you own a single-member LLC and have not elected to be taxed as an S Corporation, you generally do not need to run payroll.

In most cases, you can simply take owner's draws, and your business profits will be reported on your personal tax return.

Multi-Member LLC (Partnership)

If your LLC has two or more owners and is taxed as a partnership, the members generally do not receive a salary through payroll either.

Instead, they typically receive profit distributions and, when applicable, guaranteed payments for services they provide to the business.

LLC Taxed as an S Corporation

This is where the rules change.

If your LLC has elected to be taxed as an S Corporation and you actively work in the business, you generally must pay yourself a reasonable salary through payroll before taking additional distributions.

Why Is This Important?

Many business owners elect S Corporation status because of its potential tax advantages. However, those benefits also come with additional responsibilities.

If you actively work in your business, the IRS expects you to receive reasonable compensation for your services before taking shareholder distributions.

This doesn't mean you can't take profits out of the business—you absolutely can. It simply means you must follow the IRS rules first.

A Simple Example

Imagine your business earns $120,000 in profit during the year.

You manage the business, bring in clients, supervise employees, and make all of the key decisions.

If, throughout the year, you simply transfer money from the business bank account to your personal account without ever paying yourself a salary, the IRS may determine that some of those transfers should have been treated as wages.

That could result in additional taxes, interest, and penalties that proper planning could have helped you avoid.

Common Mistakes We See

• Assuming every LLC needs payroll.

• Electing S Corporation status but never running payroll.

• Mixing personal withdrawals with business funds.

• Waiting until tax season to address how you should pay yourself.

  
  

My Recommendation

Before deciding how to pay yourself, make sure you understand how your business is taxed.

If you own a single-member LLC or a partnership, the rules are very different from those that apply to an S Corporation. Choosing the right strategy from the beginning can help you avoid IRS issues and manage your business more effectively.

Let's Talk About Your Business

Every business is different, and there is no one-size-fits-all answer.

At Lifaver Trujillo, CPA, PLLC, we help business owners throughout North Carolina determine the best way to pay themselves based on their business structure while staying compliant with IRS regulations and taking advantage of available tax opportunities.

If you're unsure how you should pay yourself—or you're wondering whether electing S Corporation status is the right choice for your business—we'd be happy to review your situation.

Disclaimer: This article is intended for educational purposes only and does not constitute tax, legal, or financial advice. Every business should be evaluated individually before making tax or business decisions.