How to Pay Yourself as an LLC Owner in Texas Without Triggering Tax Problems

One of the first questions we get from new business owners in Carrollton, Plano, and across North Dallas is some version of: "How do I actually pay myself?" The answer depends heavily on how your business is structured, and getting it wrong can create real tax problems.

If you operate as a single-member LLC or a multi-member LLC taxed as a partnership, you are not an employee of your own business. You cannot give yourself a paycheck the same way you would pay an employee. Instead, you use something called an owner's draw.

What Is an Owner's Draw?

An owner's draw is simply a transfer of money from your business bank account to your personal bank account. No payroll taxes are withheld at the time of the transfer. However, all the profit your LLC generates is passed through to your personal tax return and taxed as self-employment income, regardless of how much you actually drew out. If your LLC made $120,000 but you only drew $60,000, you still owe taxes on the full $120,000.

This surprises a lot of business owners in Lewisville and Flower Mound who assume they only pay taxes on what they take home.

Self-Employment Tax on Top of Income Tax

As an LLC owner, you are responsible for self-employment tax on your net business income, which covers both the employee and employer portions of Social Security and Medicare at 15.3 percent on the first tier of income. On top of that, you owe regular federal income tax. Combined, many business owners in the North Dallas area find themselves owing 30 to 40 percent of their net profit when all taxes are accounted for.

If You Have Elected S-Corp Status, the Rules Are Different

If your LLC has made an S-Corp election with the IRS, you are required to pay yourself a reasonable salary as a W-2 employee of your own company. Any additional profit above your salary can be distributed to you as an owner distribution, which is not subject to self-employment tax. This split is exactly why S-Corp elections are attractive for higher-earning business owners.

Keeping Your Draws Clean and Documented

Every owner's draw should be a clear transfer from your business account to your personal account, with a record of the date and amount. Do not pay personal expenses directly from the business account and call it a draw later. That kind of mixed bookkeeping makes your financial records nearly impossible to use for tax planning, loan applications, or an IRS inquiry.