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Welcome back to Taxes Made Simple. I'm your host, Carlton Dennis, and in today's video, I'm going to explain exactly how to pay yourself as a limited liability company in 2025. A lot of people form LLC's to take advantage of the tremendous benefits that they offer, but then once they start making money, they realize that they have absolutely no idea how to pay themselves correctly from their LLC's. The last thing that you want, especially when you're finding success in your business, is to get in trouble because you didn't pay yourself correctly from your LLC. So if you're somebody that's new to business, make sure you watch all the way till the end of this video, cuz I'll give you insights on how you need to pay yourself. Let's dive in.
The first thing that you need to know about paying yourself as an LLC is that when you're the owner of an LLC, you have the option to pay yourself through what is called an owner's draw. Remember that phrase, owner's draw. Keep in mind that owner's draws are also commonly referred to as owner's distributions. But an owner's draw or an owner's distribution is when you, as the owner of the business, withdraw money from the business and transfer it to your personal account so that you can use it for personal use. Remember, as a business owner, your goal should always be to keep your personal finances and your business finances completely separate from one another. Otherwise, you can accidentally co-mingle funds, which can get you into legal trouble with the government, which you definitely don't want to deal with. So if you're somebody that wants to be a steward of your finances, you'll make sure you don't co-mingle. Owner's draws are designed to prevent this exact thing from happening. So when you think of an owner's draw, think of money being taken out of your LLC's bank account and being moved to a personal account that you can use for personal expenses.
Now I know you might be wondering, Carlton, how exactly do I set this owner's draw up? Don't worry, I've got your back here. Here are the steps on how you take the owner's draw. Step number one: Let's make sure you have your EIN number. EIN stands for Employer Identification Number. An EIN is a nine-digit number assigned by the IRS that is used by the government to track your business for tax purposes. You can apply for an EIN directly on the IRS's website. The IRS requires you to provide some basic information about your business when you apply for an EIN, such as the type of entity that it is. But once you receive your EIN from the IRS, you can move on to step number two.
Step number two is to make sure that you set up your business bank account. If you already have one for your LLC, then great. But if not, you're definitely going to need to do this. This is a very important step to getting paid. Most banks have options for business bank accounts, so you can go to your preferred bank, open up a business bank account with your EIN number. You'll need your EIN to open the business bank account. Once you provide the bank with your EIN, they will link the EIN to your business bank account so that this account is tied to your EIN instead of your Social Security. After your business bank account is set up, you will be able to start depositing money earned by your business under its EIN number to this account, and you can store the business's funds in this account.
Now here is where it gets interesting, and here's where the owner's draw comes into play. Step number three: Make your owner's draw. After your business has made enough money and you're ready to start paying yourself personally and taking some of the profits from your business to save for taxes, you can send the amount you want to take from your business bank account to your personal checking account. You can do this via a check, a bank transfer, or just cash. I recommend doing it via a check or bank transfer so that there is more of a paper trail, just in case you need this later on. You should also keep a record of the draw, including the date, the amount, and the purpose for your bookkeeping records. It is crucial to keep proper records of all of your business transactions, including owner's draws. Once you transfer the money and you record the transaction, then the owner's draw will be complete. But once it is in your personal bank account, you will be free to use it for your personal purposes.
Just keep in mind, because this is absolutely crucial, this is your personal account. When you have an LLC, you can use the owner's draw in lieu of a salary. This is where a lot of people get confused. When you're an LLC, you do not have to pay yourself a set salary. It is up to you to decide which intervals you pay yourself in and how much you pay yourself in each distribution. The intervals and the amounts do not have to be even. Many LLC owners enjoy the flexibility that owner's draws provide. This is because this flexibility allows them to leave more money in the business bank account when the business needs more cash on hand and to withdraw larger amounts of money when they're ready to take more profits personally.
But here's a word of caution when it comes to owner's draws. Some new business owners make the mistake of withdrawing too much money too soon, and this is understandable because, after all, it can be very exciting when you form a new business and when it starts making money. You get excited; you want to reinvest personally into the stock market. But I want to warn you right now: Make sure you don't withdraw too much money too quickly through your owner's draws. This is because you need to keep enough money in your business bank account to cover all of your expenses and make sure that one of those expenses that you're able to cover every year is your taxes. Do not forget about your taxes. If you are new to self-employment, you need to be aware that you will have to pay a 15.3% self-employment tax on top of your regular income taxes. The self-employment tax covers your Social Security and Medicare taxes; 12.4% goes to Social Security, 2.9% goes to Medicare. So don't forget about this, otherwise it could come back to bite you later. The last thing you want is for your business checks to start bouncing because you underestimated your expenses and your taxes and your business account balance goes to zero. So always make sure you leave enough money in your business bank account, especially when you're just starting your LLC and you're just getting to managing all of your expenses. It could be a little new for many business owners and take some time to get used to.
Now let's go over an example. Let's say you're a new LLC owner that made $130,000. You had $70,000 worth of expenses, including taxes. You paid yourself $60,000. In this circumstance, then you would be putting yourself into a lot of trouble. Don't cut it this close; make sure you always leave yourself some breathing room. Don't forget that an unexpected expense can tend to pop up. You never know when you're going to accidentally drop your business laptop or when suddenly you need to buy some more Google ads or Facebook ads to grow your business.
Now here's some other tax information for LLC owners that is important to know. Now that you know exactly how to pay yourself as an LLC with your owner's draws, I want to talk about some of the tax information that you need to know regarding the money that your business earns and that you pay yourself for tax purposes. LLC's are considered pass-through entities. Do it with me: pass-through entities. It means that business profits and losses and tax obligations pass through the business entity to the owner. One of the great advantages of this corporate structure is that it means LLC owners do not have to deal with double taxation. Let me explain: Double taxation is when a business entity is taxed at the corporate level, and then the owner of the business also has to pay taxes on the profits that they make from their business. Some other business entities, such as the C corporation, have double taxation. But as an LLC owner, the IRS will only tax your business profits one time. So keep in mind that you will owe income taxes on your LLC profits, regardless of whether you leave the money in your business bank account or if you transfer it to yourself personally. The IRS will come for its cut of your business's profits, no matter where you store it: personal account or business account. Uncle Sam always gets his cut.
Let's discuss limited liability. If you're new to LLC's, I just want to quickly remind you that LLC's offer limited liability protection. This is one of the main benefits and probably one of the primary reasons why many LLC owners set up LLC's in the first place: liability protection. To you, it means that you as a business owner will have limited liability in the event your business is sued or if it has debts called in. So, for example, in the event of a lawsuit against your business, if you have an LLC, the person who is suing you would only be able to sue what's inside of your LLC: the business assets, such as your business bank accounts or other assets that your business might own. He or she would not be able to come after your personal assets, such as your personal bank accounts or your home, depending on how your LLC has been structured and how you have maintained your corporate veil. The combination of having liability protection plus pass-through taxation is what makes LLC's such an amazing entity type and is why tens of millions of Americans choose to go with the LLC over other business types when first getting started. But down the line, however, many LLC owners do decide to switch over to the S corp in order to mitigate their self-employment tax obligations. You see, as your business becomes more and more profitable, the self-employment taxes can get larger and larger and larger, and it becomes more of an issue. If you want to learn more about S corps and when to switch from an LLC to an S corporation, then check out this video right here. It goes over when to switch from an LLC to an S corporation. If you want to have a better way of controlling your finances as you scale, you're going to have to adopt the S corp.
Now here's a question from one of my subscribers. I'm going to answer a question that a subscriber asked about this topic from a different video I did on paying yourself as an LLC. But first, I want to remind you guys that if you have any questions about paying yourself as an LLC or anything else related to entity structuring and tax issues, go ahead and book a complimentary consultation with my tax firm by clicking on the link in the description below. We'd be happy to grab a call with you to see what we can do to help. Okay, this question came in from Jada mc16 on how to pay yourself as an LLC in 2022, which was a video I did a few years ago. The question was: So what percentage should I pay myself as a rule of thumb, and how often: monthly or annually? This is a tricky one because depending on your profession will decide how you're supposed to compensate yourself from your LLC or from your S corporation. Let's just say that you've already switched your LLC to an S corporation. This is when the IRS will require you to give yourself a salary. A normal salary for an S corporation owner is different depending on what your business type is. Maybe you're an electrician; maybe you're a contractor that's fixing homes and toilets. If you're doing these types of roles, we have to look based on your jurisdiction, based on your area, what would be a reasonable salary for you in the location, city, state, and zip code that you live in, relative to the amount of business profits that's left over. If your business made $100,000 in business profit, it wouldn't make sense to just give you a salary of $70,000, even though the average electrician makes $70,000 in the United States. We would still want to make sure the salary portion is reasonable relative to the net profit of the business, and this is so important. The reason I say that is because when you switch from an LLC to an S corporation, instead of paying self-employment taxes, you're actually paying payroll taxes. So if you take a very high salary from your S corp, you're going to be paying into more Social Security and Medicare taxes, which ultimately may not benefit you in the long run from a tax savings perspective. It may benefit you if you're trying to qualify for a loan and you need to show more money, but really we want to make sure that you're taking a reasonable salary relative to your net profit. This is why in our office we do a what's called a reasonable compensation audit. If you're an LLC, taxes an S corporation, or you're a traditional S corporation owner, it's important for us to take a look at your strategies that you're implementing before the end of the year to see what's offsetting your business's profits and then determining what your salary needs to be after the fact. If you would love to learn a little bit more about how we can do tax planning for you, go ahead and visit the links below in the description. I look forward to booking a call with you and helping you save money this year. Thank you guys so much for watching this video. If you like this video, you can do something for me: like, comment, subscribe, share this with one LLC owner that needs to know how to pay themselves, and thank you so much. I'll see you on the next video.