How to Pay Yourself in a Partnership LLC

A Limited Liability Company (LLC) taxed as a partnership compensates its owners differently than traditional employment. Unlike employees with withheld salaries, partners in an LLC have a unique financial relationship. The business itself typically does not pay federal income tax, with profits and losses flowing directly to the partners.

Understanding Partner Compensation

Partners in an LLC taxed as a partnership receive funds primarily through two methods: guaranteed payments and distributions, also known as owner’s draws. These methods differ in their nature and purpose, impacting a partner’s financial standing and the LLC’s accounting.

Guaranteed payments function much like a salary for partners providing services to the LLC or for the use of their capital. These are fixed amounts paid regardless of the partnership’s profitability, ensuring a stable income stream for active partners. Internal Revenue Code Section 707 defines these payments as those made to a partner for services or capital, determined without regard to the partnership’s income. For the LLC, guaranteed payments are treated as a deductible business expense, reducing the company’s net profit. Partners receiving these payments report them as ordinary income on their personal tax returns.

Distributions, or owner’s draws, represent a partner’s share of the LLC’s profits or capital. Unlike guaranteed payments, distributions are contingent on the business achieving profitability and are typically paid out after the LLC has covered its expenses. These payments reduce the partner’s capital account within the LLC, which reflects their ownership equity in the business. Distributions are generally not considered taxable income when received, as partners are taxed on their share of the LLC’s profits regardless of whether those profits are distributed.

Guaranteed payments offer predictable income and are a deductible business expense for the LLC. Distributions are withdrawals of profit or capital, reducing a partner’s capital account without reducing the LLC’s taxable income. Guaranteed payments are subject to self-employment tax for the partner, while distributions generally are not, though the underlying profit share may be.

Tax Responsibilities for Partners

Partners in an LLC taxed as a partnership are considered self-employed. They are responsible for paying self-employment taxes and income taxes on their share of the LLC’s earnings.

Partners are subject to self-employment (SE) tax, which covers Social Security and Medicare taxes. This tax applies to both any guaranteed payments received and the partner’s share of the ordinary business income from the LLC, regardless of whether that income is actually distributed. The SE tax rate is 15.3%, comprising a 12.4% Social Security tax portion, typically applied up to an annual wage base limit ($176,100 for 2025), and a 2.9% Medicare tax portion, which has no earnings limit. To calculate the taxable amount for SE tax, a partner’s net earnings from self-employment are multiplied by 92.35%. Partners can deduct one-half of their self-employment tax paid as an adjustment to gross income on their individual income tax return.

Flow-through taxation means the LLC itself does not pay federal income tax. Instead, its profits and losses flow through to the partners’ individual tax returns. Partners are taxed on their allocated share of the partnership’s profits, even if those profits are retained by the business. Guaranteed payments are also treated as taxable ordinary income for partners, reported on their personal income tax returns.

Since taxes are not withheld from partner compensation, partners are required to pay estimated taxes quarterly throughout the year. This obligation arises if a partner expects to owe at least $1,000 in tax for the year. These estimated payments cover both the partner’s income tax and self-employment tax liability. Partners use Form 1040-ES to calculate and make these quarterly payments, generally due on April 15, June 15, September 15, and January 15 of the following year.

Essential Reporting and Records

Effective management of a Partnership LLC requires meticulous record-keeping and adherence to specific reporting requirements. These practices ensure compliance with tax regulations and provide clarity on each partner’s financial contributions and distributions.

The partnership agreement is a foundational document that outlines how partners are compensated and how the LLC operates. This agreement should clearly define policies for guaranteed payments, distributions, capital contributions, and partner responsibilities.

Accurate bookkeeping tracks all financial transactions within the LLC. Proper accounting records distinguish between business expenses, guaranteed payments made to partners, and distributions. This clear segregation ensures that financial statements accurately reflect the LLC’s performance and each partner’s capital account. Bookkeeping helps manage the capital accounts of each partner, which are affected by contributions, profits, losses, and distributions.

The Schedule K-1 (Form 1065, Partner’s Share of Income, Deductions, Credits, etc.) is a tax document prepared by the partnership and provided to each partner annually. Its purpose is to report each partner’s share of the partnership’s income, deductions, credits, and distributions for the tax year. The Schedule K-1 includes information such as ordinary business income or loss, guaranteed payments, and net earnings from self-employment. Partners use the information detailed on their Schedule K-1 to complete their individual income tax returns (Form 1040) and calculate their tax liabilities.