Owners of a multi-member LLC generally get paid one of three ways: owner draws, guaranteed payments, or a W-2 salary if the LLC has elected to be taxed as an S-corporation. Because the IRS treats a multi-member LLC as a partnership by default, the business itself pays no federal income tax; profits and losses pass through to each owner’s personal return based on ownership share.1Internal Revenue Service. LLC Filing as a Corporation or Partnership Which method you use depends on the LLC’s tax classification, what your operating agreement says, and whether the member is actively working in the business or acting as a passive investor.
Owner Draws
An owner’s draw is the most common way members take money out of a multi-member LLC. You move funds from the LLC’s bank account to your personal account by check, ACH, or wire. The amount comes from your accumulated equity or the company’s current profits.
A draw is not a wage, and it is not itself a taxable event. On the books, it is recorded as a reduction in your capital account, not as a business expense, so it does not lower the LLC’s reported net income. You are already taxed on your share of the LLC’s profits through your Schedule K-1 whether or not the cash is distributed, so the draw is simply pulling out money the tax system has already accounted for.
The flexibility cuts both ways. Members can pull cash when the business can afford it, but there is no fixed paycheck, and one member drawing more than their proportional share can throw capital accounts out of balance and create friction between co-owners. A good operating agreement sets rules for draw frequency, maximum amounts, and whether all members must draw proportionally at the same time.
Guaranteed Payments
Guaranteed payments look more like a salary. They go to a member for services performed for the business or for the use of that member’s capital, and they are paid whether or not the LLC turned a profit that year.2Internal Revenue Service. Publication 541 (12/2025), Partnerships A common setup: one member runs day-to-day operations full time while another is a passive investor, so the working member receives a fixed monthly guaranteed payment for the labor.
Unlike a draw, a guaranteed payment is deducted as a business expense on the LLC’s Form 1065, which lowers the company’s net income before the remaining profit is split among members.2Internal Revenue Service. Publication 541 (12/2025), Partnerships For the member receiving it, the payment is subject to self-employment tax. That is true even for a member who would otherwise be treated as a limited partner and avoid self-employment tax on their distributive share.3Internal Revenue Service. Entities 1 Nothing is withheld at the time of payment, so the receiving member covers the tax through quarterly estimated payments.
Bookkeeping matters. Guaranteed payments have to be clearly separated from ordinary draws in the LLC’s records. Mixing the two creates incorrect reporting on each member’s Schedule K-1.
W-2 Salary Under an S-Corporation Election
If the LLC files Form 2553, the IRS treats it as an S-corporation for federal tax purposes.4Internal Revenue Service. About Form 2553, Election by a Small Business Corporation That changes how working owners get paid: any member who performs more than minor services for the business has to be on payroll and receive a W-2 salary.
The salary must be “reasonable compensation,” meaning it reflects what someone in a comparable role would earn given their training, experience, duties, time commitment, and pay at similar businesses.5Internal Revenue Service. Wage Compensation for S Corporation Officers Setting an artificially low salary to shrink payroll tax is one of the most common S-corp audit triggers. The IRS looks at the company’s dividend history, what non-owner employees are paid, and the timing of bonuses when it evaluates whether a salary is reasonable.
Running payroll means withholding federal income tax plus Social Security tax at 6.2% and Medicare tax at 1.45% from each paycheck. The LLC pays a matching share of Social Security and Medicare and reports these amounts on Form 941 each quarter.6Internal Revenue Service. About Form 941, Employers Quarterly Federal Tax Return After reasonable salaries have been paid, remaining profit can be paid out as shareholder distributions, and those distributions are not subject to self-employment or payroll taxes. That is the primary reason working owners consider the S-corp election in the first place.
What the Operating Agreement Should Say
Before any money leaves the account, the LLC should have a written operating agreement that lays out how profits are divided and when cash is actually paid to members. The agreement sets up each owner’s capital account, a running balance that tracks contributions, withdrawals, and each member’s share of profits or losses over time.
The agreement should also draw a clear line between a distributive share and a distribution. Your distributive share is the percentage of the LLC’s total profit or loss allocated to you for tax purposes. A distribution is the actual cash that hits your account. The two numbers do not have to match. The LLC might allocate $100,000 of profit to you on paper and only distribute $60,000 in cash if it needs to hold back funds for operations.
Most agreements split profits pro-rata with ownership percentages, but the Internal Revenue Code permits special allocations that differ from ownership percentages if they have what the IRS calls “substantial economic effect.”7Office of the Law Revision Counsel. 26 USC 704 – Partners Distributive Share Two 50/50 owners could agree to send 70% of profits to the member who put in more capital, so long as the arrangement is documented and has real economic consequences beyond tax savings. Without a written agreement, the IRS falls back on each partner’s overall interest in the partnership based on all the facts and circumstances.
What Each Owner Owes on Their Personal Return
Every year the LLC files Form 1065 and issues each member a Schedule K-1 showing that member’s share of income, deductions, and credits. You use the K-1 to complete your personal Form 1040.
A wrinkle catches many new members: you owe tax on your full distributive share of the LLC’s profits even if the company distributed no cash to you that year.3Internal Revenue Service. Entities 1 This is often called phantom income. If the LLC earns $200,000 and your share is 50%, you owe tax on $100,000 whether or not a check ever arrived. That is why operating agreements should include a minimum distribution rule: members need enough cash to cover the tax bill even in years when the LLC keeps most of its earnings.
Active members also owe self-employment tax on their share of the business’s net earnings.1Internal Revenue Service. LLC Filing as a Corporation or Partnership The rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare.8Internal Revenue Service. Self-Employed Individuals Tax Center The Social Security portion applies only up to the annual wage base, which is $184,500 for 2026.9Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet Earnings above that cap still owe the 2.9% Medicare tax, and an extra 0.9% Medicare surtax kicks in on self-employment earnings above $200,000 single or $250,000 married filing jointly. You can deduct half of your self-employment tax when figuring your adjusted gross income, whether or not you itemize.10Internal Revenue Service. Business Taxes for the Self-Employed – The Basics
Because draws and guaranteed payments come to you with nothing withheld, you make quarterly estimated tax payments if you expect to owe $1,000 or more when you file.11Internal Revenue Service. Estimated Taxes For a calendar year, payments are due:12Internal Revenue Service. Individuals 2 – Estimated Tax
- April 15 for income earned January through March
- June 15 for April and May
- September 15 for June through August
- January 15 of the following year for September through December
Underpayment triggers an interest-based penalty at the IRS’s current underpayment rate, which is 7% per year, compounded daily, as of early 2026.13Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026 Many members base their quarterly payments on 100% of the prior year’s tax (110% if adjusted gross income exceeded $150,000) to sit inside a safe harbor.
Reimbursements and Benefits Members Can Still Receive
Getting paid is not only about draws and salary. Members routinely spend personal money on business expenses like travel, supplies, and client meals, and the LLC can reimburse them tax-free if it uses an accountable plan. An accountable plan requires three things:14Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
- a legitimate business connection for the expense
- documentation from the member within a reasonable time, including receipts, dates, and business purpose
- prompt return of any reimbursement that exceeds the actual expense
Reimbursements that meet all three tests are not income to the member and not subject to self-employment tax. Skip the rules and the IRS may recharacterize the payments as distributions or guaranteed payments, which creates unexpected tax for the member.
If the LLC sets up a health insurance plan, active members can deduct 100% of premiums for themselves, their spouse, and their dependents as an adjustment to income on the personal return. If the policy is in the member’s name and the member pays directly, the LLC must reimburse the member and report the premium as a guaranteed payment on the K-1.15Internal Revenue Service. Instructions for Form 7206 The deduction is not available for any month you were eligible for a plan subsidized by another employer, including a spouse’s employer.
Members also have access to retirement plans with much higher limits than a standard IRA. A SEP IRA lets the LLC contribute up to 25% of a member’s net self-employment earnings, capped at $69,000 for 2026, with no separate employee deferral.16Internal Revenue Service. SEP Contribution Limits A Solo 401(k) allows an employee elective deferral of up to $24,500 for 2026 plus an employer profit-sharing contribution of up to 25% of net self-employment earnings, with catch-up contributions available at age 50 and older.17Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026 Contributions have to come from LLC funds or from guaranteed payments reported on the K-1 to count.