Can an LLC member also be an employee?

If you’re starting a business — either by yourself or with a team — you might be wondering: can partners be on payroll in an LLC? Will you have to deal with employment taxes and paperwork? And how do you pay yourself when you run an LLC?

Getting paid for your hard work is a vital, exciting prospect as a small business owner. It’s essential to get it right. In this guide, we’ll set the record straight about paying members in an LLC, including the limited circumstances where you can pay members like employees.

First, a note about terminology: the owners of an LLC are technically known as members, not partners, so we’ll mostly be using the term “members.”

Can an LLC member be paid as an employee?

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. Only true employees can be paid a salary as long as 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 S corporation), things change. With a corporate taxation status, an LLC can pay its members more like employees.

How do LLC members get paid?

When you’re running a small business, payday is incredibly satisfying because of all the work that’s gone into it. But to protect your LLC’s corporate veil, you’ll have to pay yourself correctly. You don’t want to accidentally mingle your personal and business finances. To make that happen, you’ll have to follow one of two methods to pay your LLC members.

Take a draw from the LLC bank account

If your LLC still has its default pass-through taxation status, you’ll pay yourself and 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. That means distributions will follow the members’ distributive shares. If the operating agreement sets a schedule (or other conditions) for distributions, you’ll have to follow it.

Taxes on Member Distributions

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.

Pay yourself a salary by electing to be taxed as an S corp or C corp

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 often gives a net tax savings because it reduces the impact of self-employment taxes. The members paid as employees pay employment taxes (the taxes earmarked for Social Security and Medicare) on their salary, 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: you have to pay yourself a “reasonable salary,” one that’s similar to what others in your profession are earning for the same work. Otherwise, you could pay yourself a $1 salary and contribute nothing to Social Security or Medicare. Because of this, the IRS also tends to audit these entities more.

We can help!

Managing your finances and taxes for your LLC doesn’t have to feel daunting. ZenBusiness has your back. Whether you need help starting your LLC, want to manage your finances and payroll taxes with a streamlined money app, or anything in between, we’ve got your back.