If you’ve started a business as a Limited Liability Company (LLC) or are considering joining one, you may be wondering about compensation. Specifically, can a member of an LLC receive a salary? This is a common question, and the answer depends on how the LLC is structured for tax purposes.
Understanding how LLC members get paid is crucial for compliance and for making smart business decisions. In this article, we’ll break down the key rules and options related to LLC compensation so you know exactly what’s allowed—and what’s best for your situation.
Understanding LLC Structures and Member Roles
Before we dive into compensation, let’s clarify how an LLC works.
What Is an LLC?
An LLC, or Limited Liability Company, is a popular business structure in the U.S. because it offers flexibility, limited liability protection, and tax advantages. LLCs can have one or multiple owners, known as members.
Who Are LLC Members?
LLC members are individuals or entities that own a portion of the company. In many cases, they are also actively involved in running the business, which raises the question of how they get paid for their work.
Can LLC Members Receive a Salary?
The short answer: not usually—unless the LLC is taxed as a corporation.
Let’s break it down by LLC tax classification.
Single-Member LLCs (Sole Proprietorship by Default)
By default, a single-member LLC is taxed as a sole proprietorship. That means:
- The member cannot be treated as an employee
- The IRS does not allow salaries to be paid to the sole owner
- Instead, the member takes owner draws—withdrawals from the business profits
Key takeaway: No salary, just owner draws, which are reported on Schedule C.
Multi-Member LLCs (Partnership by Default)
A multi-member LLC is treated as a partnership by default for tax purposes. In this case:
- Members cannot receive W-2 wages or salaries
- Compensation is distributed through guaranteed payments or profit distributions
- These payments are reported on Schedule K-1
Guaranteed payments are often used to compensate members for active work in the business, and they are taxed as ordinary income.
LLCs Electing to Be Taxed as an S Corporation
Here’s where it gets interesting. If your LLC elects to be taxed as an S corporation, then:
- Members can become employee-owners
- They can be paid a reasonable salary via W-2 payroll
- Additional profits can be distributed as dividends, which may have tax advantages
This is a popular strategy for LLCs with consistent profits who want to save on self-employment taxes.
LLCs Electing to Be Taxed as a C Corporation
Similarly, if an LLC chooses C corporation taxation:
- Members who work in the business can be paid as employees
- They receive a salary, subject to employment tax withholding
- Profits are taxed at the corporate level and again when distributed as dividends (double taxation)
This setup is less common for small businesses but is an option.
Key Differences: Draws vs. Salaries vs. Guaranteed Payments
Let’s compare the main compensation types for LLC members:
| Compensation Type | Available To | Subject to Payroll Taxes | Reported On |
|---|---|---|---|
| Owner’s Draw | Single-member LLCs | No | Schedule C |
| Profit Distribution | Multi-member LLCs | No | Schedule K-1 |
| Guaranteed Payment | Multi-member LLCs | Yes (Self-Employment Tax) | Schedule K-1 |
| Salary (W-2) | LLCs taxed as S or C Corporations | Yes | W-2 Form |
How to Decide Which Compensation Method Is Best
Your decision should consider several factors:
- How your LLC is taxed (default vs. corporate election)
- How much money the business makes
- How active you are in the business
- Your long-term financial and tax goals
When Is Electing S Corp Status a Good Idea?
- You earn consistent profits over $40,000–$50,000 per year
- You want to reduce self-employment taxes
- You’re willing to handle extra paperwork like payroll and tax filings
Consulting with a tax professional or accountant can help you decide if this route is worth it for your situation.
Common Mistakes to Avoid
Here are some frequent pitfalls business owners should watch out for:
- Paying yourself a salary from a default LLC without the proper tax election
- Failing to file IRS Form 2553 to elect S corp taxation
- Not paying a reasonable salary to yourself under an S corp (can trigger IRS scrutiny)
- Mixing business and personal finances, especially when taking draws
Pro tip: Keep clean books and document everything—especially how you compensate yourself.
Final Thoughts: Can a Member of an LLC Receive a Salary?
In most cases, LLC members cannot receive a traditional salary—unless the LLC elects to be taxed as a corporation. By default, members are compensated through draws, distributions, or guaranteed payments.
However, if you’re looking for the benefits of receiving a W-2 paycheck and reducing your self-employment tax burden, electing S corporation status might be a smart move.
Andre Cuevas provides career insights, job search strategies, and professional advice to help individuals navigate the job market and achieve their career goals.
