How to Handle LLC Owners Draw Taxes

For new owners of a Limited Liability Company (LLC), understanding how to get paid is a frequent source of confusion. The mechanism for this is the owner’s draw, which is a distribution of the company’s profits to its members. Unlike a salary, a draw is not a wage and does not have taxes withheld at the time of payment. The tax implications of draws are managed directly by the owner, not the business, creating responsibilities that differ from traditional employment.

Understanding LLC Profit and Pass-Through Taxation

An LLC is a “pass-through” entity for tax purposes, meaning the business itself does not pay federal income taxes. Instead, profits and losses “pass through” to the owners, who report this information on their personal tax returns. This structure avoids the double taxation that can occur with other corporate forms. An owner’s taxable income is their share of the company’s total profit for the year, regardless of how much they actually withdrew.

The specific tax reporting depends on the number of members in the LLC. A single-member LLC is treated by default as a sole proprietorship. The owner reports all business income and expenses on Schedule C, “Profit or Loss from Business,” which is filed with their personal Form 1040. The net profit calculated on Schedule C becomes part of the owner’s total taxable income for the year.

A multi-member LLC is treated by default as a partnership. The LLC files an informational return, Form 1065, with the IRS to report its financial activity. From this return, each member receives a Schedule K-1, which details their individual share of the LLC’s profits and losses. Members then use the information from their Schedule K-1 to complete their personal Form 1040.

The Role of Self-Employment Tax

Beyond regular income tax, LLC owners are also subject to self-employment tax. This tax is the business owner’s equivalent of the Social Security and Medicare taxes, often referred to as FICA taxes, that are withheld from an employee’s paycheck.

The self-employment tax rate is 15.3%. This rate is composed of two parts: 12.4% for Social Security on earnings up to an annual limit, and 2.9% for Medicare with no earnings limit. For 2025, the Social Security portion applies to the first $176,100 of net earnings from self-employment.

To calculate the tax, you first multiply your net earnings from self-employment by 92.35% to find the taxable amount. This adjustment accounts for the portion of the tax that would have been paid by an employer. You can deduct one-half of your total self-employment tax when calculating your adjusted gross income (AGI), which lowers your overall income tax liability.

Paying Taxes Through Estimated Payments

Because taxes are not withheld from an owner’s draw, LLC members must pay their income and self-employment taxes throughout the year. The U.S. tax system operates on a “pay-as-you-go” basis, which requires individuals to pay tax as they earn income. For LLC owners, this is accomplished through making quarterly estimated tax payments to the IRS.

To determine the amount of these payments, owners use Form 1040-ES, “Estimated Tax for Individuals.” This form includes a worksheet that helps you project your annual income and deductions to estimate your total tax liability. You must make estimated tax payments if you expect to owe at least $1,000 in tax for the year. The total estimated tax is divided into four installments.

For the 2025 tax year, payments are due on April 15, 2025; June 16, 2025; September 15, 2025; and January 15, 2026. If a due date falls on a weekend or holiday, the payment is due on the next business day. Missing these deadlines or underpaying can result in penalties from the IRS. Payment can be submitted through several methods.

• Mailing a check or money order with a payment voucher from Form 1040-ES.
• Using IRS Direct Pay for electronic bank transfers.
• Paying through the Electronic Federal Tax Payment System (EFTPS).
• Submitting a payment using the IRS2Go mobile app.

Alternative LLC Tax Elections

An LLC offers flexibility in how it can be taxed, and owners can elect for the business to be treated differently than the default classifications. The most common alternative is the S Corporation (S-Corp) election, which can offer tax advantages under the right circumstances. To make this election, the LLC files Form 2553, which changes the tax structure without altering the legal status of the LLC.

When an LLC is taxed as an S-Corp, the owner-employee must be paid a “reasonable salary” for the services they provide. This salary is considered W-2 wages, and the business withholds and pays payroll taxes on this amount. Any profit left after paying the salary and other business expenses can be distributed to the owner as a distribution. These distributions are not subject to self-employment or payroll taxes.

This structure can lead to tax savings, as only the salary portion is subject to FICA taxes. The IRS requires that the salary paid be “reasonable” for the industry and the work performed. An unreasonably low salary can be reclassified by the IRS as wages, leading to back taxes and penalties.

A less common choice for an LLC is to be taxed as a C Corporation (C-Corp) by filing Form 8832. This election subjects the LLC to corporate income tax. Owners are paid through salaries, which are subject to payroll taxes, and may also receive dividends from the company’s after-tax profits. This creates a system of double taxation, as profits are taxed at the corporate level and again when distributed as dividends, making it a less popular option for most small businesses.