You simply transfer money from your business account to your personal account whenever needed. This isn't technically a salary—it's taking money from your ownership stake in the company. The amount you can draw is limited to your capital account balance and available cash flow.
Tax treatment: Draws themselves aren't taxed, but all LLC profits are subject to self-employment tax (15.3%) regardless of how much you actually withdraw. Since Tennessee has no state income tax on wages and salaries, you only pay federal income tax and self-employment tax on your LLC's net earnings.
How to do it
Ensure your LLC has sufficient cash flow and your capital account can cover the withdrawal
Transfer the desired amount from your business bank account to your personal account
Record the transaction in your books as an owner's draw, not as a business expense
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Guaranteed Payment
Guaranteed payments are predetermined amounts paid to LLC members for services rendered, regardless of whether the LLC is profitable. These payments are similar to salaries but are treated differently for tax purposes. The LLC can deduct guaranteed payments as a business expense.
Tax treatment: Guaranteed payments are subject to self-employment tax (15.3%) for the recipient and are deductible by the LLC. The recipient pays federal income tax on these payments, but Tennessee's lack of state income tax on wages means no additional state tax burden.
How to do it
Document guaranteed payment arrangements in your LLC operating agreement
Set up regular payment schedule and process payments like you would employee salaries
Issue Schedule K-1s to members showing guaranteed payments separately from distributive share of profits
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 a W-2 employee of your own company 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.
Tax treatment: Your salary is subject to payroll taxes (15.3% total between employer and employee portions), while profit distributions above your salary are only subject to federal income tax. Tennessee has no state income tax on either wages or dividends, making this election potentially more beneficial than in other states.
How to do it
File Form 2553 with the IRS to elect S-Corp tax treatment (must be done by March 15th or within 2.5 months of forming the LLC)
Set up payroll system and pay yourself a reasonable salary with proper payroll tax withholdings
Distribute any remaining profits as dividends to members based on their ownership percentages
Tennessee Tax Notes for LLC Owners
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Income Tax
Tennessee has no state income tax on wages, salaries, or business income, which can make LLC ownership more tax-efficient compared to other states. LLC owners only pay federal income taxes on their share of profits.
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Self-Employment Tax
Tennessee LLC owners must still pay federal self-employment tax (15.3%) on their share of LLC profits when the LLC is taxed as a sole proprietorship or partnership. This applies regardless of how much money you actually withdraw from the business.
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Estimated Taxes
Tennessee LLC owners must make quarterly estimated federal tax payments to cover income tax and self-employment tax obligations since no taxes are automatically withheld from LLC distributions. Payments are due April 15, June 15, September 15, and January 15 of the following year.
Common Mistakes to Avoid
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Mixing personal and business funds by using business accounts for personal expenses or treating owner draws as business deductions
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Failing to make quarterly estimated tax payments, leading to underpayment penalties and a large tax bill at year-end
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Not properly documenting owner draws and guaranteed payments, making it difficult to track capital accounts and prepare accurate tax returns
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Either paying yourself too little (limiting personal cash flow) or too much (depleting business capital needed for operations and growth)