When you operate as an LLC, paying yourself doesn’t have to be complicated — but it does need to be done right. Unlike a traditional paycheck, your compensation as an LLC owner comes from the profits your business earns. This process is called an owner’s draw, and it’s how you take home money while keeping your business finances organized.
Let’s walk through how it works, how much to pay yourself, and what to keep in mind as you manage your cash flow and taxes.
What It Means to “Pay Yourself”
If your LLC hasn’t elected S Corp status, the IRS treats it as a disregarded entity. That means your business and personal income are taxed together — the business doesn’t pay its own income tax.
When you take money out of your LLC, you’re not earning a wage or paying yourself through payroll. You’re simply transferring profits from your business to yourself as the owner. These transfers are called owner’s draws.
Key things to know:
- You can pay yourself whenever you want — weekly, monthly, or as needed.
- The money you transfer is not a deductible expense (it’s a withdrawal of profit).
- You’ll pay taxes on your business’s net profit, not on each draw you take.
How to Pay Yourself
Keep your accounts separate
Maintain a dedicated business checking account and never pay personal bills from it. When you pay yourself, always transfer money to your personal account or write yourself a check labeled “Owner’s Draw.”
Decide on a rhythm
Some owners prefer a consistent “payday” every month to make budgeting easier. Others draw funds only when cash flow allows. Either approach is fine — what matters is consistency and documentation.
Track every draw
Your bookkeeping should record each transfer as an owner’s draw (not “salary” or “payroll”). Collective’s bookkeeping system automatically categorizes these transactions, so your end-of-year numbers accurately show what’s taxable and what’s not.
How Much to Pay Yourself
There’s no required amount — it depends on how much your business earns and what you need personally.
Here’s one framework you could use:
- Start with your profit. Review your P&L to understand how much your business truly earns after expenses.
- Set aside money for taxes. A common rule of thumb used is to save around 25–30% of your profit for federal and state taxes. (Collective helps with quarterly estimates to help you plan.)
- Cover business reserves. Keep enough in your business account to handle upcoming expenses and a small cushion for slow months.
- Transfer the rest to yourself. Once your essentials and taxes are covered, the remaining profit can be paid to you as an owner’s draw.
Many members find it helpful to set up two recurring transfers — one to personal checking and one to a separate tax savings account — so they’re paying themselves and saving for taxes at the same time.
Tax Implications
Even though you’re not on payroll, your profits are still taxable. You’ll report your business income and expenses on Schedule C as part of your personal tax return (Form 1040).
That means:
- You’ll pay income tax on your profit
- You’ll also pay self-employment tax (which covers Social Security and Medicare)
- You’ll likely need to make quarterly estimated tax payments to avoid penalties
Your draws don’t affect how much tax you owe — only your net profit does. Whether you take $1,000 or $10,000 out of your business, your taxable income is based on what the business earned, not what you withdrew.
Common Mistakes to Avoid
- Mixing accounts – Don’t pay personal bills directly from your business account
- Calling draws “salary” or “wages” – You don’t have a W-2 or payroll as an LLC owner
- Forgetting about taxes – Since nothing’s being withheld, set aside tax money regularly
- Overdrawing your business – Leave enough in your business account to stay cash-positive and cover future expenses
Best Practices
- Keep your business and personal accounts completely separate
- Transfer money to yourself as “Owner’s Draw” — not “Income” or “Expense”
- Save regularly for quarterly taxes
- Track your draws in bookkeeping (Collective does this automatically for you)
- Review your P&L monthly so you know how much profit you can safely take
Example: How It Works
The following is for illustrative purposes only. Let’s say your LLC earns $8,000 in revenue this month and has $2,000 in business expenses. That leaves $6,000 in profit.
Here’s one way you might handle that:
- Set aside $1,800 (30%) for taxes
- Keep $1,200 in your business account for future expenses
- Pay yourself an owner’s draw of $3,000
Next month, you repeat the same approach based on your new profit. This cadence keeps your taxes covered, your business stable, and your pay consistent.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as legal, financial, or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate and/or licensed adviser, or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.