How to Pay Yourself From Your Texas LLC Without the IRS Headaches

You built the business. You did the work. You earned the money. Now you want to get paid.

Simple, right? Open your business account, transfer money to your personal account, done.

Except the IRS has opinions. Strong opinions. And getting this wrong creates tax problems that compound year after year until someone notices.

How you pay yourself from your Texas LLC isn’t a matter of preference. It’s determined by your tax classification. Let’s get it straight.

First: How Is Your LLC Taxed?

Your payment method depends entirely on how the IRS classifies your LLC:

Single-member LLC: Treated as a “disregarded entity” (sole proprietorship for tax purposes)

Multi-member LLC: Treated as a partnership by default

LLC with S-Corp election: Treated as an S Corporation

LLC with C-Corp election: Treated as a C Corporation (rare for small businesses)

Each classification has different rules for how you get money out of the business.

Owner’s Draw: The Default Method

For most Texas LLCs without a corporate election, the owner’s draw is the simplest approach.

How It Works

An owner’s draw is simply a withdrawal from your business account to your personal account. No payroll involved. No taxes withheld at the time. No formal paycheck.

A Houston consultant running a single-member LLC transfers $8,000 from her business checking to her personal checking on the 15th of each month. That’s an owner’s draw.

The Tax Reality

Here’s where people get confused: draws aren’t considered wages. You don’t pay income tax or self-employment tax at the moment you take the draw.

Instead, you pay:

Self-employment tax: 15.3% on net earnings up to $176,100 (2025), then 2.9% above that
Federal income tax: At your marginal rate based on total taxable income
No Texas state income tax: One advantage of being here

The critical point: you owe these taxes on your LLC’s net profit, regardless of how much you actually draw. Taking smaller draws doesn’t reduce your tax liability.

If your LLC earned $100,000 in net profit but you only drew $60,000, you still owe taxes on $100,000.

Recording It Correctly

Owner’s draws reduce your equity in the company. They are not business expenses.

Recording draws as expenses is a common bookkeeping mistake that:

Understates your actual profit
Creates incorrect financial statements
Raises red flags with the IRS
Makes tax preparation a nightmare

When you take a draw, record it as a reduction in owner’s equity, not as an expense.

Salary Method: For S-Corp LLCs

If your LLC elected S-Corp status, the rules change dramatically.

The Requirement

S-Corp owners who work in the business must pay themselves a reasonable salary through payroll. This isn’t optional. The IRS mandates it.

What “Reasonable” Means

The IRS scrutinizes S-Corp owner salaries. Factors determining reasonableness include:

Industry standards for your role
Your education and experience
Time devoted to the business
Business revenue and profitability
Geographic location (Houston salaries differ from rural Texas towns)

A Houston business owner working full-time as the primary service provider, with $150,000 in net profit, paying themselves $40,000 as salary would likely face IRS scrutiny. That’s unreasonably low for full-time work generating that income level.

The Mechanics

With S-Corp election, you must:

Set up formal payroll (in-house or through a service)
Withhold federal income tax, Social Security, and Medicare
Pay employer portions of FICA taxes
File quarterly payroll tax returns (Form 941)
Issue yourself a W-2 at year-end
Pay any remaining profits as distributions

Why Bother? The Tax Savings

The benefit of S-Corp taxation: only your salary is subject to self-employment taxes (FICA). Distributions are not.

Example at $120,000 net profit:

As standard LLC:

Self-employment tax on $120,000: approximately $18,360
All profit subject to SE tax

As S-Corp with $60,000 salary and $60,000 distribution:

Payroll tax on $60,000: approximately $9,180
Distribution: $0 SE tax
Savings: approximately $9,180 annually

That’s real money. Enough to fund a retirement account. Or reinvest in your business. Or simply keep more of what you earned.

Guaranteed Payments: Multi-Member LLCs

If your LLC has multiple members and is taxed as a partnership, you might use guaranteed payments.

How They Work

Guaranteed payments are fixed payments to a partner for services rendered, regardless of partnership income. They’re similar to salary but without payroll tax withholding.

The receiving partner pays self-employment tax and income tax on guaranteed payments. The LLC deducts them as a business expense.

When to Use Them

Consider guaranteed payments when:

One partner provides significantly more services than others
Partners need regular, predictable income
You want to separate compensation from profit distributions

Common Mistakes That Create Problems

Mistake 1: Treating Draws as Expenses

Your personal draw is not a business expense. It doesn’t reduce taxable income. Recording it that way creates incorrect books and potential audit issues.

Mistake 2: Not Setting Aside Taxes

With draws, no taxes are withheld. Many business owners spend everything they draw, then face a massive tax bill in April.

Set aside 25-35% of your net profit for quarterly estimated taxes. Do it when you take each draw, not as an afterthought.

Mistake 3: Commingling Funds

Even with an LLC, mixing personal and business finances can pierce your liability protection. Always draw from business to personal, then spend from personal.

Never pay personal expenses directly from your business account. The extra step matters.

Mistake 4: Ignoring Quarterly Estimates

If you expect to owe $1,000 or more in federal taxes, you must make quarterly estimated payments. Missing these creates penalties and interest that add up fast.

2025 Quarterly Due Dates:

Q1: April 15, 2025
Q2: June 16, 2025
Q3: September 15, 2025
Q4: January 15, 2026

Mistake 5: Setting S-Corp Salary Too Low

The IRS has increased audits of S-Corps with unreasonably low officer compensation. If your salary is clearly below market rate for your role, expect problems.

A few thousand in extra payroll tax savings isn’t worth the audit risk and potential penalties.

Which Method Makes Sense for You?

Annual Net Profit	Typical Approach
Under $40,000	Owner’s draw (standard LLC)
$40,000-$80,000	Evaluate S-Corp election carefully
Over $80,000	S-Corp election often beneficial

The break-even point varies. S-Corp adds compliance costs ($1,500-$3,000 annually for payroll processing and additional tax filing). The self-employment tax savings must exceed these costs to make sense.

At $50,000 net profit, savings might be $2,000-3,000, barely covering compliance costs. At $120,000, savings might be $8,000-9,000, clearly exceeding costs.

Run the numbers with a CPA before deciding.

Texas-Specific Considerations

Texas has no state income tax, which simplifies things. But you still need to consider:

Texas Franchise Tax: Applies to businesses exceeding $2.47 million in total revenue (2025). Most small businesses fall below this threshold.

Payroll compliance: If you go S-Corp, Texas has state unemployment insurance requirements even though there’s no income tax.

Liability protection: Proper draw documentation helps maintain your LLC’s liability shield.

Getting This Right From the Start

Paying yourself incorrectly creates problems that compound over time. Messy equity accounts. Incorrect tax filings. IRS notices you don’t understand.

At EZQ Group, we help Houston and Texas business owners structure their compensation correctly from day one. Whether you’re deciding between LLC tax elections or setting up payroll for your S-Corp, we provide the guidance you need.

This article provides general information and is not tax advice. Tax situations vary, and you should consult with a qualified tax professional about your specific circumstances.