A draw is not a salary, and the difference is the whole article
When you take money out of your LLC as the owner, you are almost never "getting paid" in the way an employee is. You are moving money you already own from a business bank account to a personal one. That transfer is called an owner draw (or a member distribution), and it is not a deductible business expense, it is not reported on a W-2, and no tax is withheld from it.
The tax was already triggered by the profit, not by the transfer. A default LLC is a pass-through entity: every dollar of net profit lands on your personal return whether you withdraw it or leave it in the business account. Owners who assume they are only taxed on what they take out are the ones who get a nasty surprise in April.
A salary is the opposite. It is a deductible expense to the business, it is reported on a W-2, it has income tax and FICA withheld, and it only becomes available to an LLC after it elects to be taxed as an S corporation (or a C corporation). That single distinction drives everything below.
Single-member LLC: the default is a draw, and the tax bill is on 100% of profit
By default the IRS treats a single-member LLC as a disregarded entity. The LLC does not file its own income tax return. You report business income and expenses on Schedule C, attached to your Form 1040, and the net profit flows to two places:
- Schedule SE, where it is hit with self-employment tax, which is the self-employed version of Social Security and Medicare.
- Form 1040, where it is added to your other income and taxed at ordinary rates.
Draws never appear anywhere on the return. You could take $0 out or take every dollar out and your federal tax would be identical. What you must do instead is fund the tax yourself through quarterly estimated payments, because nobody is withholding for you.
Multi-member LLC: distributions versus guaranteed payments
A multi-member LLC defaults to partnership taxation. It files Form 1065 and issues each member a Schedule K-1 showing their share of profit. Members pay tax on their allocated share, again regardless of what was actually distributed.
Partnerships have one extra tool: the guaranteed payment. This is a fixed amount paid to a member for services or for use of capital, set out in the operating agreement, and paid whether or not the LLC is profitable. It is deductible at the partnership level and reported to the member on the K-1, and it is still subject to self-employment tax. So a guaranteed payment behaves a bit like a salary economically, but it is not a W-2 wage and does not go through payroll. A common structure is a modest guaranteed payment for the active manager plus profit distributions split by ownership percentage.
The 2026 numbers that actually decide this
Self-employment tax is 15.3% applied to 92.35% of your net business profit, made up of 12.4% Social Security and 2.9% Medicare. The Social Security portion stops at the annual wage base. The Medicare portion never stops. Here are the confirmed figures for tax year 2026.
| Item | 2026 figure | Applies to |
|---|---|---|
| Self-employment tax rate | 15.3% | 92.35% of Schedule C or K-1 self-employment earnings |
| Social Security portion (self-employed) | 12.4% | Net SE earnings up to $184,500 |
| Social Security portion (employee + employer) | 6.2% + 6.2% | W-2 wages up to $184,500 |
| Social Security wage base | $184,500 (up from $176,100 in 2025) | Maximum SS tax of $22,878 if self-employed |
| Medicare portion (self-employed) | 2.9% | All net SE earnings, no cap |
| Medicare portion (employee + employer) | 1.45% + 1.45% | All W-2 wages, no cap |
| Additional Medicare tax | 0.9% | Wages or SE income above $200,000 single, $250,000 joint, $125,000 married filing separately |
| Deductible half of SE tax | 50% | Above-the-line deduction on Form 1040 |
| FUTA (only once you run payroll) | 6.0%, net 0.6% after full state credit | First $7,000 of each employee's wages |
| QBI deduction threshold | $201,750 single / $403,500 joint | Below this, the 20% deduction is not wage-limited |
| Standard deduction | $16,100 single / $32,200 joint | Tax year 2026 |
Sources: IRS self-employment tax, the SSA contribution and benefit base, IRS Topic 759 (FUTA), and the IRS 2026 inflation adjustments in Rev. Proc. 2025-32.
The 2026 single-filer brackets you will need for the example: 10% to $12,400, 12% to $50,400, 22% to $105,700, 24% to $201,775, then 32%, 35% and 37% above that.
What actually changes when you elect S corporation status
An LLC that files Form 2553 keeps its legal identity but changes its tax treatment. It becomes a corporation for tax purposes, files Form 1120-S, and the owner becomes a shareholder-employee. Now you split your money into two streams:
- A W-2 salary, which is subject to the full 15.3% FICA (half withheld from you, half paid by the LLC) plus FUTA and state unemployment tax.
- A distribution, which passes through on a K-1 and is not subject to self-employment or FICA tax at all.
That second line is the entire point. Profit above your salary escapes the 15.3% layer. But there are two catches most articles skip. First, the salary must be reasonable (see below). Second, W-2 wages are not qualified business income, so electing S-corp status shrinks your 20% QBI deduction. That partially claws back the payroll savings, and you have to model both effects together or the answer is wrong.
Reasonable compensation: the rule that stops you paying yourself $1
The IRS is explicit that an S corporation must pay reasonable compensation to a shareholder-employee for services rendered before non-wage distributions may be made. If you do not, the IRS can reclassify distributions as wages, and then assess back employment taxes, penalties and interest. See the IRS page on S corporation compensation and fact sheet FS-2008-25.
There is no statutory percentage. The factors the IRS and the courts actually look at are: your training and experience, your duties and hours, what comparable businesses pay for similar services, dividend history, payments to non-shareholder employees, and how much of the profit is attributable to your personal labor versus capital or other staff. In practice, defensible salaries for a solo consultant tend to land in the range of 40% to 60% of profit, benchmarked against real market data for the role. Document the benchmark before you set the number, not after an audit letter arrives.
Worked example: $150,000 of profit, draw versus salary (2026)
Single filer, no other income, standard deduction, no state tax in this illustration. The LLC nets $150,000 before any owner compensation.
Path A: default LLC, owner takes draws.
- Net earnings from self-employment: $150,000 x 92.35% = $138,525.
- SE tax: $138,525 x 15.3% = $21,194 (all below the $184,500 cap).
- Deduct half of SE tax: $150,000 minus $10,597 = AGI of $139,403.
- Less the $16,100 standard deduction: $123,303 before QBI.
- QBI deduction is the lesser of 20% of QBI ($27,881) or 20% of taxable income ($24,661), so $24,661. Taxable income: $98,642.
- Federal income tax: $16,413.
- Total federal cost: $37,607.
Path B: same LLC, S-corp election, $70,000 salary.
- Employer-side FICA: $70,000 x 7.65% = $5,355. FUTA: $7,000 x 0.6% = $42.
- Pass-through profit on the K-1: $150,000 minus $70,000 minus $5,355 minus $42 = $74,603.
- Employee-side FICA withheld: $70,000 x 7.65% = $5,355. Total employment tax: $10,752.
- AGI: $70,000 + $74,603 = $144,603. Less $16,100: $128,503 before QBI.
- QBI is only the $74,603 of K-1 income (salary does not count), so the deduction drops to $14,921. Taxable income: $113,582.
- Federal income tax: $19,858.
- Total federal cost: $30,610.
The S-corp route saves $6,997. Note how the saving is not the full 15.3% of the $80,000 distribution: the employment tax saving is about $10,442, but a smaller QBI deduction and a higher taxable income give back roughly $3,400 of it. Then subtract real compliance costs (payroll service, an 1120-S return, and state fees such as California's 1.5% S-corp tax with an $800 minimum), which typically run $1,200 to $2,500 per year. You are left with roughly $4,500 to $5,800 of genuine annual benefit. Model your own numbers with the LLC vs S-corp calculator.
When switching to payroll actually pays
Below roughly $50,000 of net profit, an S-corp election usually loses money: the compliance cost eats the saving, and a low salary relative to profit is harder to defend. Between $50,000 and $80,000 it is a genuine judgement call that depends on your state and how cheaply you can run payroll. Above about $80,000 to $100,000 of profit the arithmetic usually favours the election, and it keeps improving until your salary alone exceeds the $184,500 Social Security cap, at which point the remaining benefit is only the 2.9% Medicare layer plus, for high earners, the 0.9% additional Medicare tax.
Other reasons to stay on draws: you want to keep the maximum QBI deduction, you have losses you want to use flexibly, you have foreign or non-resident members (an S corp cannot have them), or you simply will not run payroll reliably every month. Run your default position first in the sole proprietor and LLC tax calculator so you know the baseline you are trying to beat.
Mechanics: basis, capital accounts and actually moving the money
Whichever route you take, keep the plumbing clean. Use a separate business bank account and record every withdrawal to an owner's draw or distribution account, never to "expenses". Your ability to take money out tax-free is limited by your basis: distributions in excess of basis become taxable gain, which is a real trap for owners who take out more than the business has earned and contributed.
If you elect S-corp status, you must run true payroll. That means registering for an EIN and state withholding, filing Form 941 each quarter, filing Form 940 for FUTA annually, issuing yourself a W-2 by 31 January, and paying deposits on schedule. A $70,000 "salary" recorded as a journal entry with no deposits and no W-2 is not a salary and will not survive scrutiny. Owner health insurance premiums paid by the S corp must also be added to Box 1 of your W-2 and then deducted on your 1040.
Deadlines and forms you cannot miss
Because nobody withholds tax from a draw, you owe quarterly estimated tax using Form 1040-ES if you expect to owe $1,000 or more. For tax year 2026 the due dates are 15 April 2026, 15 June 2026, 15 September 2026 and 15 January 2027. The safe harbour: pay 90% of the current year's tax, or 100% of last year's (110% if your prior-year AGI exceeded $150,000), and the underpayment penalty goes away.
For the S election, Form 2553 must generally be filed no later than two months and 15 days after the beginning of the tax year the election is to take effect, so mid-March for a calendar-year business. Miss it and late election relief under Rev. Proc. 2013-30 is often available if you have consistently reported as an S corp. The Form 1120-S itself is due 15 March following the tax year (15 March 2027 for the 2026 year), with a six-month extension available on Form 7004. Partnerships file Form 1065 on the same 15 March deadline.