How to Pay Yourself as an LLC in 2026

Quick Overview

To properly pay yourself as an LLC owner in 2026 and avoid issues like double taxation or IRS scrutiny, you must first obtain an EIN, then open a dedicated business bank account, and finally take formal owner's draws/distributions while diligently documenting every transaction and setting aside funds for self-employment taxes (15.3% plus Medicare at 2.9%).

Key Points: LLC owners should take formal owner's draws, not fixed salaries, to separate personal and business finances. Step 1 requires obtaining an Employer Identification Number (EIN) from the IRS. Step 2 mandates opening a dedicated business bank account, which is non-negotiable for proper bookkeeping. Step 3 involves taking the owner's draw via check, transfer, or cash, ensuring all business transactions run through the business account. LLC owners must set aside 15.3% for self-employment taxes plus 2.9% for Medicare on their draws to avoid nasty surprises during tax season. Proper documentation of draws (date, amount, purpose) is critical for bookkeeping and preparing for potential IRS audits. The LLC structure offers limited liability protection, safeguarding personal assets (home, car, bank accounts) from business debts or lawsuits.

Context: This video provides a step-by-step guide for Limited Liability Company (LLC) owners on the correct procedure for paying themselves, specifically looking ahead to 2026 tax considerations. The presenter emphasizes the importance of separating personal and business finances to maintain liability protection and ensure tax compliance, contrasting the LLC structure with C Corporations regarding double taxation.

Detailed Analysis

The video outlines a three-step process for LLC owners to pay themselves correctly in anticipation of 2026 regulations, aiming to maximize flexibility, maintain liability protection, and ensure tax compliance. Step 1 is securing an EIN (Employer Identification Number) from the IRS (1:20). Step 2 is opening a dedicated business bank account, which the speaker stresses is non-negotiable (1:42). All business transactions must flow through this account to maintain clear separation from personal finances (2:04). Step 3 is taking the actual owner's draw, which can be done via check, bank transfer, or cash, ensuring every transfer is meticulously documented (3:08). A crucial caution is highlighted: owners must set aside money for self-employment taxes, which total 15.3% (Social Security) plus 2.9% (Medicare) on the income taken as draws, avoiding sudden tax bills (3:54). The primary benefit of the LLC structure is limited liability protection, which shields personal assets like homes and cars from business debts or lawsuits (6:02). Finally, the speaker notes that LLCs can elect S-Corp taxation status, which may reduce self-employment tax burdens once profits reach a certain level, offering significant tax savings compared to operating as a standard disregarded entity (5:42).