Can LLC Owners Get a Salary or Be on Payroll?

Limited Liability Companies (LLCs) are a popular business structure known for their flexibility in management and taxation. A common question for LLC owners is how they receive compensation, specifically if they can be on payroll like a traditional employee. Owner compensation depends on the LLC’s tax classification with the Internal Revenue Service (IRS). This tax status dictates how owners are paid, including whether they receive a regular salary or other income distributions.

LLC Tax Classifications and Owner Status

The IRS offers several ways an LLC can be taxed, directly influencing owner compensation and employment status. An LLC’s default tax classification depends on the number of members.

A single-member LLC (SMLLC) is treated as a “disregarded entity” for federal income tax purposes. The owner reports business income and expenses on their personal tax return, usually Schedule C (Form 1040). The individual owner is considered self-employed, not an employee of the LLC.

A multi-member LLC (MMLLC) is taxed as a partnership by default. The business files an informational return, Form 1065, and each member receives a Schedule K-1, reporting their share of the LLC’s income or loss on their personal tax return. Like SMLLC owners, partners in a multi-member LLC are considered self-employed.

LLCs can elect to be taxed as a corporation. An LLC can elect S-corporation status by filing Form 2553. This election allows the business’s income, losses, deductions, and credits to pass through to the owners’ personal tax returns, but with distinct rules for owner compensation.

Alternatively, an LLC can elect C-corporation status by filing Form 8832. A C-corporation is a separate legal and tax entity, paying corporate income tax on its profits. Owners who work for the company under this classification are treated as employees of the corporation.

Owner Compensation for Pass-Through LLCs

For LLCs taxed as disregarded entities or partnerships, owner compensation differs from traditional payroll. Owners do not receive a W-2 wage. Instead, they compensate themselves through “owner’s draws” or “distributions.”

An owner’s draw involves taking money directly from the business’s profits for personal use. These funds are not considered wages or salary for tax purposes. Since the LLC’s profits and losses pass through to the owner’s personal tax return, the owner pays taxes on the business’s net income, regardless of the amount drawn.

Owners of these pass-through entities are considered self-employed by the IRS. This means they are responsible for paying self-employment taxes, which fund Social Security and Medicare. The self-employment tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. For 2025, the Social Security portion applies to earnings up to $176,100, while the Medicare portion has no wage limit.

For multi-member LLCs taxed as partnerships, “guaranteed payments” are an additional compensation method. These payments are made to a partner for services or use of capital, determined without regard to the partnership’s income. Guaranteed payments are distinct from distributions and are reported on Schedule K-1, subject to self-employment tax.

Owner Compensation for Corporate-Taxed LLCs

When an LLC elects to be taxed as an S-corporation or C-corporation, owner compensation rules change significantly. An owner who actively works for the business under these classifications is considered an employee. This means they must be paid a salary through W-2 wages, similar to any other employee.

For S-corporations, the IRS mandates that owner-employees receive “reasonable compensation” for their services. This salary must be comparable to what a non-owner would be paid for similar services in a similar industry. This rule ensures owners pay their fair share of payroll taxes, preventing them from taking all profits as distributions to avoid these taxes. Any remaining profits after paying the reasonable salary can be taken as distributions, which are not subject to self-employment tax, but are subject to income tax.

Owners on payroll, whether in an S-corp or C-corp, can participate in employee benefit plans, including health insurance and retirement plans. The LLC, as the employer, is responsible for withholding and remitting payroll taxes from the owner’s W-2 wages. These include Federal Insurance Contributions Act (FICA) taxes, which cover Social Security and Medicare. In 2025, the FICA tax rate is 15.3%, split equally between the employee and employer (7.65% each). The LLC must also pay its share of these taxes and may be responsible for federal and state unemployment taxes on the owner’s wages.

Choosing the Right Compensation Approach

Whether an LLC owner can be on payroll depends on the LLC’s chosen tax classification. LLCs operating under their default pass-through status, as sole proprietorships or partnerships, compensate owners through draws or guaranteed payments. These owners are considered self-employed and are directly responsible for self-employment taxes on their share of the business’s net earnings.

In contrast, LLCs that elect to be taxed as S-corporations or C-corporations treat active owners as employees. This requires paying them a reasonable salary via W-2 wages, which are subject to traditional payroll taxes, including FICA. Any additional profits in an S-corp can then be distributed as non-wage distributions. The choice between these compensation structures involves evaluating tax implications, administrative complexity, and the desire for specific employee benefits.