Can I Hire Myself as an Independent Contractor for My Own LLC?

Running an LLC offers flexibility, but it also raises questions about how business owners can pay themselves. One common question is whether you can hire yourself as an independent contractor for your own LLC. This decision affects taxes, legal liability, and business operations, making it essential to understand the implications.

Before taking this approach, it’s important to consider tax regulations, classification rules, and proper documentation to avoid potential issues with the IRS or state agencies.

Criteria for Contractor Classification

Whether you can classify yourself as an independent contractor for your LLC depends on how the IRS and state agencies define contractor relationships. The key factor is control—if the LLC dictates how, when, and where work is performed, the IRS is likely to consider the worker an employee. Misclassification can lead to penalties, back taxes, and interest.

The IRS uses a three-factor test to assess classification: behavioral control, financial control, and the nature of the relationship. Behavioral control examines whether the business directs the worker’s tasks. Financial control looks at how expenses are reimbursed and whether the worker has an opportunity for profit or loss. The relationship factor considers contracts, benefits, and the permanency of the arrangement. If the LLC provides ongoing work, supplies tools, and covers expenses, it suggests an employer-employee relationship.

State laws may impose additional requirements. California, for example, applies the ABC test, which presumes a worker is an employee unless they meet three criteria: they must be free from control, perform work outside the usual course of business, and operate an independent trade. If your LLC’s primary business aligns with the services you provide, meeting this test can be difficult.

Tax Forms and Filings

Paying yourself as an independent contractor changes tax reporting requirements. Independent contractors handle their own self-employment taxes, so the LLC does not withhold payroll taxes or provide a W-2. Instead, payments exceeding $600 in a year must be reported on Form 1099-NEC, which the LLC files with the IRS and provides to the contractor by January 31.

Since independent contractors do not have automatic tax withholdings, estimated tax payments must be made quarterly to the IRS. These payments cover self-employment taxes, which include Social Security and Medicare contributions totaling 15.3% as of 2024. Income taxes must also be accounted for to avoid underpayment penalties. IRS Form 1040-ES is used to calculate and submit these quarterly payments, with deadlines on April 15, June 15, September 15, and January 15.

For LLCs taxed as sole proprietorships or disregarded entities, business income and expenses are reported on Schedule C of the owner’s personal tax return. If the LLC is taxed as an S-corporation, paying yourself as an independent contractor can create compliance issues. S-corp owners are expected to take a reasonable salary subject to payroll taxes before receiving distributions. Misclassifying payments could attract IRS scrutiny and penalties.

Payment Methodology

Structuring payments properly ensures tax compliance and financial separation between personal and business finances. Using a dedicated business bank account for all LLC transactions keeps financial records clear. Payments should be made from the LLC’s account to your personal account through an invoice-based system to establish a formal record.

A consistent invoicing process adds transparency. Each invoice should include the date, services provided, payment terms, and amount due. Accounting software like QuickBooks or Wave can automate invoice generation and track payments. Keeping copies of invoices and payment confirmations for at least three to seven years aligns with IRS record-keeping recommendations.

Determining reasonable compensation is also important. While independent contractors set their own rates, payments should align with market rates for similar services to avoid IRS scrutiny. Overpaying yourself could be seen as an attempt to reduce taxable profits, while underpaying may not hold up if the IRS examines whether the arrangement reflects a genuine business relationship. Researching industry standards through the Bureau of Labor Statistics (BLS) or consulting a CPA can help establish fair pricing.

Contractual Agreements

Drafting a formal contract between yourself and your LLC helps establish a legitimate independent contractor relationship. The agreement should outline the scope of work, payment terms, deadlines, and specific obligations. Defining these elements in writing reinforces the business arrangement and reduces the risk of IRS scrutiny. Contracts should specify deliverables, expected timelines, and termination clauses to ensure the engagement mirrors standard third-party contractor agreements.

Legal enforceability is another consideration. The contract should detail liability, confidentiality, and indemnification provisions. If the LLC provides a service requiring professional liability coverage, the agreement should clarify whether the contractor—yourself—must maintain separate insurance. Additionally, non-compete or non-solicitation clauses may be necessary if the LLC operates in a competitive industry, ensuring that the independent contractor relationship does not undermine business interests.