You simply transfer money from your business account to your personal account as needed. The amount you draw is considered a distribution of profits, not compensation for services. This method offers the most flexibility in timing and amount.
Tax treatment: Owner's draws are not subject to payroll taxes, but the LLC's entire profit is subject to self-employment tax regardless of how much you actually withdraw. In Rhode Island, you'll pay state income tax on your share of LLC profits at rates ranging from 3.75% to 5.99%.
How to do it
Transfer funds from your LLC business account to your personal account
Record the transaction in your bookkeeping system as an owner distribution
Set aside money for quarterly estimated taxes on your share of LLC profits
2
Guaranteed Payment
The LLC makes regular payments to members for services performed, similar to a salary but without payroll tax withholding. These payments are guaranteed regardless of the LLC's profitability. The payment amount is deductible to the LLC and taxable to the receiving member.
Tax treatment: Guaranteed payments are subject to self-employment tax and treated as ordinary income. Rhode Island taxes these payments as regular income at state rates of 3.75% to 5.99%. The LLC can deduct guaranteed payments as a business expense.
How to do it
Document the guaranteed payment arrangement in your operating agreement
Make regular payments from the LLC to the member for services performed
Report guaranteed payments on Schedule K-1 and pay self-employment tax on the amount
3
Salary via S-Corp Election
Your LLC elects to be taxed as an S-Corporation with the IRS. As an employee-owner, you receive a reasonable salary subject to payroll taxes, plus additional distributions that are not subject to self-employment tax. This method requires more administrative work but can provide tax savings.
Tax treatment: Your salary is subject to payroll taxes (Social Security and Medicare), while additional distributions are taxed as ordinary income without self-employment tax. Rhode Island follows federal S-Corp tax treatment, so distributions are taxed at regular state income tax rates without additional employment taxes.
How to do it
File Form 2553 with the IRS to elect S-Corporation tax status for your LLC
Set up payroll to pay yourself a reasonable salary with proper tax withholding
Take additional distributions beyond your salary, which are not subject to self-employment tax
Rhode Island Tax Notes for LLC Owners
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Income Tax
Rhode Island imposes state income tax on LLC owners' distributive share of profits at rates ranging from 3.75% to 5.99% based on income level. LLC income passes through to owners' personal tax returns regardless of the payment method chosen.
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Self-Employment Tax
Rhode Island LLC owners are subject to federal self-employment tax of 15.3% on their share of LLC profits when taxed as sole proprietorships or partnerships. The S-Corp election can help reduce this burden by limiting SE tax to reasonable salary amounts only.
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Estimated Taxes
Rhode Island LLC owners must make quarterly estimated tax payments if they expect to owe $300 or more in state income tax for the year. Federal quarterly payments are required if you expect to owe $1,000 or more. Due dates are typically April 15, June 15, September 15, and January 15.
Common Mistakes to Avoid
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Mixing personal and business finances by using business accounts for personal expenses instead of taking proper distributions
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Failing to make quarterly estimated tax payments and facing penalties and interest from both Rhode Island and the IRS
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Not documenting owner draws and guaranteed payments properly, making tax preparation difficult and audit defense challenging
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Paying yourself too much during lean periods or too little when the business is profitable, rather than taking a strategic approach to compensation