How to Pay Yourself From an LLC the Right Way in 2026

As we help clients determine if an S-corp election makes sense we are seeing a lot of confusion about wages and distributions. So we've come up with a few lessons to help our clients understand how to pay themselves. When you pay yourself from an LLC without a clear strategy, your bank balance can look healthy while a hidden tax bill quietly grows in the background. Improper owner pay is one of the biggest reasons business owners experience IRS audits, rejected loan applications, and brutal tax-time surprises. If you want 2026 to be the year you stop guessing and start paying yourself correctly, it starts with understanding the rules behind how to pay yourself from an LLC. ## Lesson 1: For Single-Member LLCs, Payroll Is Literally Illegal One of the most common mistakes we see? A single-member LLC owner putting themselves on payroll “just to be safe.” Unless you’ve made an S Corp election, this is not allowed. The IRS treats a single-member LLC and its owner as the same taxable entity. You cannot be both employer and employee. Issuing yourself a W-2 without an S Corp election creates an illegal compensation setup—and it’s often caught during audits or bookkeeping cleanups. You don’t “hire” yourself. Every dollar your LLC earns already belongs to you. Paying yourself is simply moving money from your business pocket to your personal pocket. ## Lesson 2: The Owner Draw Illusion (Cash Flow ≠ Profit) If you don’t have an S Corp election, the correct way to pay yourself from an LLC is through owner draws. Here’s the trap: many owners assume that taking money out lowers their taxes. It doesn’t. Your taxes are based on net profit, not how much cash you withdraw. That’s why the “tax shock” happens—owner draws have zero tax withholding. How Owner Draws Actually Work Balance Sheet: Cash goes down, owner equity goes down Income Statement: Nothing changes - draws are not expenses Pro tip for 2026: Every time you take an owner draw, immediately move 25–30% into a separate tax savings account. Treat it like money that never existed. ## Lesson 3: Partnerships Need Structure—Guaranteed Payments Matter In multi-member LLCs, compensation isn’t just about cash flow—it’s about fairness. Partners can be paid through: 1 - Distributions (draws) 2 - Guaranteed payments Guaranteed payments act like a salary (but without a W-2). They compensate a partner for work performed or capital invested—even if the business isn’t profitable yet. Why This Matters Partners doing the work get paid first. Equity distributions happen after that and resentment stays out of the business. If one partner is grinding while another is passive, guaranteed payments create clarity and stability. ## Lesson 4: The S Corp Strategy - When Payroll Is Required The only time payroll is required to pay yourself from an LLC is after making an S Corp election. At that point, the IRS requires a hybrid approach: 1 - Reasonable salary via payroll (W-2 with withholdings) 2 - Distributions for profits beyond that salary The Big Red Flag Paying yourself $20,000 in salary while taking $150,000 in distributions is one of the fastest ways to invite an IRS review. A reasonable salary is what you’d have to pay someone else to do your job. If no one would take the role for that wage, the IRS won’t buy it either. ## Lesson 5: Clean Documentation Is Your Best Audit Defense In 2026, the IRS isn’t just focused on what you pay yourself—it’s focused on how it’s recorded. Messy books kill: 1 - Loan approvals 2 - Exit valuations 3 - Audit defenses Correct Documentation Matters: 1 - Owner draws & distributions: Balance Sheet → Equity 2 - Payroll & guaranteed payments: Income Statement → Expenses 3 - Blurring these lines makes your business look unreliable, even if it’s profitable. ## Conclusion: Pay Yourself With Confidence in 2026 Paying yourself from an LLC isn’t about grabbing cash—it’s about keeping it legally and strategically. To move forward with confidence: 1 - Confirm your entity type 2 - Use the correct pay method (draw, guaranteed payment, or S Corp hybrid) 3 - Automate clean documentation now—not at tax time Ask yourself this: Is your current pay structure helping your business grow—or quietly setting you up for an IRS problem? The cost of fixing this early is always lower than fixing it later.

Why You’re Likely Paying Yourself Wrong: 5 Critical LLC Lessons for 2026

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