You withdraw money directly from the LLC's bank account as needed, treating it as a distribution of profits rather than wages. The amount you can draw is limited to your ownership percentage and the LLC's available cash flow. This method offers maximum flexibility since there's no set schedule or amount required.
Tax treatment: Owner's draws are not subject to payroll taxes, but you'll pay self-employment tax (15.3%) on your entire share of LLC profits, regardless of how much you actually withdraw. Texas has no state income tax, so you only pay federal income tax and self-employment tax on your LLC income.
How to do it
Ensure your LLC operating agreement allows for owner distributions and specifies how they're calculated
Transfer money from your LLC business account to your personal account, documenting the transaction as an owner's draw
Track all draws throughout the year for tax reporting and maintain detailed records of the amounts and dates
2
Guaranteed Payment
The LLC makes regular payments to specific members for services rendered, regardless of whether the business is profitable that period. These payments are treated as business expenses for the LLC and must be reasonable for the services provided. Guaranteed payments are typically used when members have different roles or time commitments to the business.
Tax treatment: Guaranteed payments are subject to self-employment tax (15.3%) and are deductible as a business expense for the LLC. The receiving member pays federal income tax on the payments, with no Texas state income tax. The LLC issues a Schedule K-1 showing both guaranteed payments and any additional profit distributions.
How to do it
Document guaranteed payment arrangements in your LLC operating agreement, specifying amounts, frequency, and services provided
Set up regular payment schedule through your business payroll system or accounting software
Issue Schedule K-1 forms to all members showing guaranteed payments and profit/loss allocations for tax reporting
3
Salary via S-Corp Election
Your LLC elects to be taxed as an S-Corporation, requiring owner-employees to receive reasonable salaries subject to payroll taxes. Additional profits can be distributed as dividends, which aren't subject to self-employment tax. This method requires more administrative work but can provide significant tax savings for profitable businesses.
Tax treatment: Salary portions are subject to payroll taxes (15.3% split between employer and employee), while dividend distributions avoid self-employment tax entirely. Texas has no state income tax, so you only pay federal taxes on both salary and distributions. The LLC must run payroll and file additional tax forms as an S-Corp.
How to do it
File Form 2553 with the IRS to elect S-Corporation tax treatment for your LLC within the required timeframe
Set up payroll to pay yourself a reasonable salary for your role, withholding appropriate federal taxes and unemployment insurance
Distribute additional profits as dividends to members based on ownership percentages, avoiding self-employment tax on these amounts
Texas Tax Notes for LLC Owners
🧾
Income Tax
Texas has no state income tax, so LLC owners only pay federal income tax on their share of LLC profits and any guaranteed payments or salary received.
💼
Self-Employment Tax
Texas LLC owners must pay federal self-employment tax (15.3%) on their share of LLC profits when using owner's draws or guaranteed payments, but can reduce this through S-Corp election salary/distribution strategies.
📅
Estimated Taxes
Texas LLC owners must make quarterly estimated tax payments to the IRS for both income tax and self-employment tax since no taxes are withheld from LLC distributions. Payments are due January 15, April 15, June 15, and September 15.
Common Mistakes to Avoid
⚠
Mixing personal and business finances by using business accounts for personal expenses instead of taking proper documented draws
⚠
Failing to make quarterly estimated tax payments, resulting in penalties and interest charges from the IRS
⚠
Not properly documenting owner's draws and guaranteed payments, creating problems during tax preparation and potential IRS audits
⚠
Taking too little compensation (underpaying) which limits business growth, or too much (overpaying) which creates cash flow problems for the LLC