You withdraw money directly from your LLC's bank account as needed throughout the year. The LLC doesn't treat these withdrawals as business expenses, and you don't receive a W-2. Instead, you pay taxes on your share of the LLC's profits regardless of how much you actually withdraw.
Tax treatment: In New Jersey, you'll pay self-employment tax (15.3%) on your share of LLC profits, plus federal income tax and New Jersey state income tax at rates ranging from 1.4% to 10.75%. You must make quarterly estimated tax payments to both the IRS and New Jersey Division of Taxation since no taxes are withheld from draws.
How to do it
Open a separate business bank account for your LLC and keep it completely separate from your personal finances
Write yourself a check or transfer money from the LLC account to your personal account, recording the transaction as an 'owner's draw' in your bookkeeping
Set aside 25-30% of your draw for quarterly estimated tax payments to cover federal income tax, self-employment tax, and New Jersey state income tax
2
Guaranteed Payment
The LLC pays you a predetermined amount for your work, similar to a salary, regardless of the company's profitability that year. These payments are deductible business expenses for the LLC and must be documented in your operating agreement. You'll receive a Schedule K-1 showing both your guaranteed payment and your share of remaining profits or losses.
Tax treatment: Guaranteed payments are subject to self-employment tax (15.3%) and are taxed as ordinary income at both federal and New Jersey state levels. New Jersey taxes these payments at rates from 1.4% to 10.75% depending on your total income. You'll also owe taxes on your distributive share of any remaining LLC profits.
How to do it
Document the guaranteed payment amount and schedule in your LLC operating agreement, specifying when and how much each member will receive
Set up regular payments from the LLC bank account to each member receiving guaranteed payments, treating these as deductible business expenses
Issue Schedule K-1s to all members showing guaranteed payments received and their share of remaining profits, and make quarterly estimated tax payments
3
Salary via S-Corp Election
Your LLC elects to be taxed as an S-Corporation by filing Form 2553 with the IRS. You become an employee of your own LLC and must pay yourself a reasonable salary subject to payroll taxes. Any remaining profits can be distributed as dividends, which aren't subject to self-employment tax but are still subject to income tax.
Tax treatment: Your salary is subject to payroll taxes (15.3% split between employer and employee portions) and New Jersey state income tax withholding. Distributions beyond your salary are subject to federal and New Jersey income tax but not self-employment tax, potentially saving you thousands annually. New Jersey has no special S-Corp tax election requirements beyond the federal election.
How to do it
File Form 2553 with the IRS to elect S-Corp taxation and obtain an Employer Identification Number (EIN) if you don't already have one
Set up payroll processing to pay yourself a reasonable salary based on industry standards, withholding federal, state, and payroll taxes
After paying your salary and business expenses, distribute remaining profits as dividends to avoid self-employment tax on those amounts
New Jersey Tax Notes for LLC Owners
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Income Tax
New Jersey imposes state income tax on LLC owners at rates ranging from 1.4% to 10.75% depending on income level, with the highest rate applying to income over $1 million.
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Self-Employment Tax
New Jersey LLC owners must pay federal self-employment tax (15.3%) on their share of LLC profits, but New Jersey doesn't impose an additional state self-employment tax.
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Estimated Taxes
New Jersey LLC owners must make quarterly estimated tax payments by January 15, April 15, June 15, and September 15 for state taxes, in addition to federal quarterly payments, if they expect to owe $400 or more in New Jersey income tax.
Common Mistakes to Avoid
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Mixing personal and business funds by using the LLC bank account for personal expenses or failing to properly document owner's draws
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Not making quarterly estimated tax payments and facing penalties from both the IRS and New Jersey Division of Taxation at year-end
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Failing to document draws and guaranteed payments properly, which can create issues during tax preparation and potential IRS audits
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Paying yourself too much during slow periods without maintaining adequate cash reserves, or paying yourself too little and missing opportunities for tax-advantaged distributions