It is possible for a Limited Liability Company to pay members a salary, but this depends on the tax classification.

An LLC that elected to be taxed as a sole proprietorship or partnership is unable to pay its members a salary. Since the LLC is a pass-through entity, the members “salary” are the profits of the business. Instead of a salary like an employee, members can receive a draw from the LLC.  This may subject the members to paying quarterly federal estimated tax payments.

An LLC that elected to be taxed as a corporation can pay its members a salary that work in the business as they are considered employees. This will mean having to withhold income tax and pay a part of payroll taxes such as social security and Medicare (the employee pays part as well). The remaining business profits are distributed as dividends to shareholders. Since dividends are typically taxed less than income, it is important to ensure members are being paid a “reasonable salary”.  It’s tempting to want to pay a majority of salary as dividends but that increases the risk of an audit from the IRS. The IRS test of what is reasonable varies by industry and the member’s involvement in the business activities.

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