6 Rules for Paying Yourself From an LLC Taxed as a Partnership

Sam's List Editorial | 2026-08-07

6 Rules for Paying Yourself From an LLC Taxed as a Partnership Half the multi-member LLCs in the country are running an S-corp playbook on a partnership return. The tell is always the same. Somebody set up payroll for the owners, ran W-2 wages all year, and filed a 1065. It looks tidy. It is wrong, and the cleanup usually spans two tax years. Paying yourself from an LLC partnership works on a completely different set of rules than paying yourself from an S corporation. Here are the six that matter, starting with the one that causes the most damage. 1. Paying Yourself From an LLC Does Not Mean Payroll A partner in a partnership is generally not an employee of that partnership. Rev. Rul. 69-184 is the long-standing position, and an LLC taxed as a partnership is a partnership for this purpose. So there is no W-2 for you. No federal income tax withholding on your own draw. No employer share of FICA on your compensation. Doing it anyway creates problems in both directions. The partnership has withheld and remitted payroll tax on amounts that were not wages, the partner has a W-2 reporting income that should have been reported on a K-1, and the partner's self-employment tax on the distributive share was never computed. Unwinding it typically means amended payroll returns, amended personal returns, or both. The single exception people cite is a partner who is an employee of a different entity in the structure, which is a real planning technique and also a structure to build deliberately with counsel rather than discover by accident. 2. reliable Payments Are the Compensation Mechanism Section 707(c) is how a partnership pays a partner for services or for the use of capital in an amount determined without regard to partnership income. Practically, a reliable payment is your salary equivalent. Three features define it: It is paid whether or not the partnership is profitable, which is the "reliable" part. It is generally deductible by the partnership, which means it reduces the income allocated to all partners including you. It is ordinary income to you, reported on your K-1 rather than a W-2, and it is generally subject to self-employment tax. The operating agreement has to actually provide for it. A partner who takes a fixed monthly amount that the agreement never mentions has created an ambiguity about whether it was compensation or a draw, and the two are taxed differently. 3. A Distribution Is Not Income and Not Compensation This is the conceptual break that catches almost everyone. You are taxed on your distributive share of partnership income, which...

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