Colorado LLC
Yes, an LLC member can also be an employee, serving both as an owner and a hired worker within the company. But that scenario is only allowed in specific situations.
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Last Updated: April 7, 2026
If a person is starting a business — either by themselves or with a team — they might be wondering: can members (the term for the owners of an LLC) be on payroll in an LLC? Will the owners have to deal with employment taxes and paperwork? And how does an LLC owner pay themself from their LLC?
Getting paid for hard work is a vital, exciting prospect as a small business owner. It’s essential to get it right. This guide sets the record straight about paying members in an LLC, including the limited circumstances where business owners can pay members like employees.
In most cases, a limited liability company (LLC) member can’t be paid as an employee. LLC members are paid through member distributions, which are considered to be self-employment income. That means they’re subject to self-employment taxes and pass-through taxation for income (see the pass-through taxation definition guide for more information). Only true employees can be paid a salary, provided the business maintains its default tax status.
That said, if the members of the LLC elect to be taxed as a corporation (either as a C corporation or an S corporation), things change. With a corporate taxation status, an LLC can pay its members more like employees.
When a person is running a small business, payday is incredibly satisfying because of all the work that’s gone into it. But to protect the LLC’s corporate veil, the owners have to pay themselves correctly. Business owners don’t want to accidentally mingle their personal and business finances. To make that happen, they’ll have to follow one of two methods to pay their LLC members.
If an LLC still has its default pass-through taxation status, an owner will pay themselves and any other members through a member distribution. Member distributions are basically draws from the LLC’s bank account, transferred to each member. But these distributions should be carefully regulated and documented to maintain separation between business and personal funds.
An LLC should only make distributions in accordance with its operating agreement (check out the “How to Create an Operating Agreement” guide to learn more). That means distributions will be based on the members’ distributive shares. If the operating agreement sets a schedule (or other conditions) for distributions, the members have to follow it.
Member distributions are taxed at the personal income tax rate for federal income tax purposes, and it often repeats itself on the state level. But on top of income taxes, LLC members will be liable for self-employment taxes on their portion of the LLC income. These taxes include Social Security and Medicare, and they’re primarily levied on the federal level.
The other payment option is only available to LLCs that elect to be taxed as an S corporation or a C corporation. As a C corporation, an LLC incurs double taxation — where the LLC pays taxes first on the business income before making distributions, and then members pay income taxes on the distributions they receive. Double taxation, however, can sometimes be offset by a lighter self-employment tax burden. S corporations keep pass-through taxation but can pay their members like employees.
That’s because LLCs with corporation tax status can pay their members a salary (and any remaining profits as member distributions). This approach may provide net tax savings because it reduces the impact of self-employment taxes. The members pay employment taxes (the taxes earmarked for Social Security and Medicare) on their salaries, but they don’t pay them on the distributions they receive. For some LLCs, this can mean saving thousands of dollars in taxes for the members.
There is, of course, a catch: members have to pay themselves a “reasonable salary,” one that’s similar to what others in the profession are earning for the same work. Otherwise, the owners could pay themselves a $1 salary and contribute nothing to Social Security or Medicare. Because of this, the IRS also tends to audit these entities more.
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The IRS only allows LLC members to receive a salary if the entity is taxed like a corporation. LLCs that maintain their default tax status must pay their members through distributions only. Those distributions are taxable income subject to personal income taxes and self-employment taxes.
Since income tax obligations can be tricky no matter what the business structure is, it’s highly recommended to consult with a licensed tax professional for help.
LLC members usually won’t receive a W-2 from their own LLC. The only exception is LLCs that elect to be taxed like a corporation. Those LLCs can pay their members like employees, complete with payroll taxes, income tax withholding payments, employee wages, and W-2s.
Partners are not considered employees, regardless of whether they’re in a multi-member LLC taxed as a partnership or a general partnership. To be treated as employees, they’d need to be in an LLC that’s classified as a corporation for tax purposes. Only then would they receive W-2 income.
Single-member LLCs are actually taxed like sole proprietorships by default for federal income tax purposes. Even though the LLC is a separate legal entity, it passes its tax burden through to its sole owner, who reports that income on their personal tax return. This approach only changes if the LLC elects to be taxed as a corporation.
Multi-member LLCs are taxed like general partnerships by default, but they have an extra step compared to sole proprietorships. They have to file the Share of Partnership Income form while they’re filing their federal income tax returns.
If someone pays self-employment taxes, the IRS allows them to count half of those taxes as deductible expenses. This might seem like a small tax benefit, but every deduction adds up.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
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