An owner's draw is when you transfer money from your LLC's business bank account to your personal account. You're essentially taking a portion of the profits you've already earned. The draw isn't considered a business expense and doesn't reduce your LLC's taxable income.
Tax treatment: Owner's draws are not subject to payroll taxes, but the entire profit of your LLC (regardless of how much you draw) is subject to self-employment tax of 15.3%. In Minnesota, you'll also pay state income tax on your LLC profits at rates ranging from 5.35% to 9.85% depending on your income level.
How to do it
Open a separate business bank account for your Minnesota LLC to maintain clear separation of business and personal funds
Transfer money from your LLC business account to your personal account, documenting each draw with the date, amount, and purpose
Set aside approximately 30-35% of your draws for federal self-employment tax, federal income tax, and Minnesota state income tax
2
Guaranteed Payment
A guaranteed payment is a predetermined amount paid to an LLC member for services rendered to the business, regardless of whether the LLC is profitable. These payments are treated as business expenses and reduce the LLC's taxable income. They're similar to a salary but don't require payroll tax withholding.
Tax treatment: Guaranteed payments are subject to self-employment tax of 15.3% for the recipient and are deductible as business expenses for the LLC. In Minnesota, the recipient pays state income tax on guaranteed payments at rates from 5.35% to 9.85%, and the payments reduce the LLC's overall taxable income.
How to do it
Document the guaranteed payment arrangement in your LLC operating agreement, specifying the amount and payment schedule
Make regular payments to the member and issue a Schedule K-1 at year-end showing the guaranteed payment amount
The receiving member should make quarterly estimated tax payments to cover self-employment tax and Minnesota state income tax on the guaranteed payments
3
Salary via S-Corp Election
Your LLC elects to be taxed as an S-Corporation by filing Form 2553 with the IRS. As an S-Corp, you become an employee and must pay yourself a reasonable salary subject to payroll taxes. Any additional profits can be distributed as dividends, which aren't subject to self-employment tax.
Tax treatment: Your salary is subject to payroll taxes (15.3% total for Social Security and Medicare), but dividend distributions are not subject to self-employment tax. In Minnesota, both salary and dividends are subject to state income tax at rates from 5.35% to 9.85%. The payroll tax savings on dividends can be significant for higher earners.
How to do it
File Form 2553 with the IRS to elect S-Corp tax status for your Minnesota LLC (must be filed by March 15th for current year election)
Set up payroll to pay yourself a reasonable salary, withholding federal and state income taxes plus payroll taxes
Take additional profits as dividend distributions throughout the year, which avoid self-employment tax but are still subject to Minnesota income tax
Minnesota Tax Notes for LLC Owners
🧾
Income Tax
Minnesota has a progressive income tax system with rates ranging from 5.35% to 9.85% for 2026. LLC owners pay Minnesota state income tax on their share of LLC profits, regardless of the payment method used.
💼
Self-Employment Tax
Minnesota LLC owners are subject to federal self-employment tax of 15.3% on their share of LLC profits when using owner's draws or guaranteed payments. This tax applies to the entire profit amount, not just what you withdraw.
📅
Estimated Taxes
Minnesota LLC owners must make quarterly estimated tax payments if they expect to owe $500 or more in state income tax for the year. Federal quarterly payments are required if you expect to owe $1,000 or more. Payments are due April 15, June 15, September 15, and January 15.
Common Mistakes to Avoid
⚠
Mixing personal and business expenses by using the same bank account, which creates tax complications and reduces legal protection
⚠
Failing to make quarterly estimated tax payments and facing penalties from both the IRS and Minnesota Department of Revenue
⚠
Not properly documenting owner's draws or guaranteed payments, making it difficult to track compensation for tax purposes
⚠
Either paying yourself too much (risking cash flow problems) or too little (failing to account for the value of your work and time)