You transfer money from your LLC's business bank account to your personal account whenever you need it. This isn't technically a salary since you're drawing from your ownership stake in the business. The amount you can draw is limited by your LLC's available cash and your ownership percentage.
Tax treatment: Owner's draws aren't taxed when you take them since you already pay taxes on your share of LLC profits whether you withdraw the money or not. In California, you'll pay state income tax on LLC profits at rates from 1% to 13.3% depending on your income level. You'll also owe federal and California self-employment taxes on your share of LLC profits.
How to do it
Set up separate business and personal bank accounts to maintain clear financial records
Transfer money from your LLC's business account to your personal account, documenting each draw with the date, amount, and purpose
Track all draws throughout the year since you'll report your share of LLC profits on your personal tax return regardless of how much you actually withdrew
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Guaranteed Payment
The LLC makes regular payments to members for services performed, similar to how an employer pays employees. These payments are made regardless of whether the LLC is profitable that year. Guaranteed payments must be documented in your operating agreement and are treated as business expenses for the LLC.
Tax treatment: Guaranteed payments are taxed as ordinary income to the recipient and are subject to self-employment tax. The LLC can deduct these payments as business expenses. In California, recipients pay state income tax on guaranteed payments at rates from 1% to 13.3%. The payments are also subject to federal and California self-employment taxes.
How to do it
Document the guaranteed payment arrangement in your LLC operating agreement, specifying payment amounts, frequency, and which members are eligible
Set up regular payment schedule (monthly or quarterly) and issue payments consistently from the LLC's business account
Issue Form 1099-NEC to each member receiving guaranteed payments over $600 per year and report payments on the LLC's tax return
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Salary via S-Corp Election
Your LLC elects to be taxed as an S-Corporation, allowing you to become an employee of your own business. You receive a W-2 salary subject to payroll taxes, plus additional distributions that aren't subject to self-employment tax. The salary must be reasonable for the work you perform.
Tax treatment: Salary is subject to regular payroll taxes (Social Security, Medicare, unemployment) but additional distributions avoid self-employment tax. In California, both salary and distributions are subject to state income tax at rates from 1% to 13.3%. This election can provide significant self-employment tax savings for profitable LLCs.
How to do it
File Form 2553 with the IRS to elect S-Corp tax treatment for your LLC, which must be done by March 15th of the tax year or within 75 days of forming your LLC
Set up payroll processing to pay yourself a reasonable salary with proper tax withholdings, and register for California payroll taxes with the EDD
Take additional distributions beyond your salary as needed, ensuring you maintain proper documentation for both salary payments and distribution amounts
California Tax Notes for LLC Owners
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Income Tax
California imposes state income tax on LLC owner income at rates from 1% to 13.3% (plus a 1% mental health tax on income over $1 million). LLC owners report their share of profits on their personal California tax return (Form 540).
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Self-Employment Tax
California LLC owners pay federal self-employment tax (15.3%) on their share of LLC profits, but California doesn't impose additional state self-employment tax. However, California does require disability insurance contributions through payroll if you elect S-Corp taxation.
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Estimated Taxes
California LLC owners must make quarterly estimated tax payments if they expect to owe $500 or more in state tax. Federal estimated taxes are due if you expect to owe $1,000 or more. Payments are due January 15, April 15, June 15, and September 15 for the prior quarter.
Common Mistakes to Avoid
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Mixing personal and business expenses by using the LLC bank account for personal purchases instead of taking proper owner's draws
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Failing to make quarterly estimated tax payments and facing penalties from both the IRS and California Franchise Tax Board
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Not documenting owner's draws or payments properly, making tax preparation difficult and creating audit risks
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Taking too much money early in the business (leaving insufficient working capital) or taking too little and missing opportunities for tax planning