How to Pay Yourself From Your Texas LLC Without the IRS Headaches

You built the business. You did the work. You earned the money. Now you want to get paid.

I’ve been doing this for a decade. Every month I get a call from an owner who’s been transferring money from business to personal without understanding the tax consequences. Then April hits and they’re shocked.

The IRS doesn’t care about intent. They care about structure. How you pay yourself isn’t optional. It’s determined by how your LLC is classified for taxes.

Let me show you the right way.

First: How Is Your LLC Taxed?

Your payment method depends entirely on how the IRS classifies your LLC:

Single-member LLC: The IRS ignores the LLC and treats you as a sole proprietor. You report everything on Schedule C.

Multi-member LLC: The IRS treats this as a partnership unless you elect otherwise. Each member reports their share on Schedule K-1.

LLC with S-Corp election: You file Form 2553 and the IRS taxes you as a corporation. This changes everything about how you pay yourself.

LLC with C-Corp election: Rare for small businesses and usually a mistake. Your LLC pays corporate tax, you pay personal tax. Double taxation.

Each classification has completely different rules for how money leaves the business.

Owner’s Draw: The Default Method

For most Texas LLCs without a corporate election, the owner’s draw is the method. It’s straightforward and requires no payroll processing.

How It Works

An owner’s draw is simple. You move money from business checking to personal checking. No taxes withheld. No W-2 issued. No paperwork beyond your bank statement.

I had a consultant in the Energy Corridor running a single-member LLC. She transferred $8,000 from business to personal on the 15th of each month. That’s a draw.

The Tax Reality

Here’s where most owners get it wrong. A draw isn’t income. You don’t pay tax on the money when you transfer it.

But you will pay tax. Here’s what:

Self-employment tax: 15.3% on your net profit up to $176,100 (2025), then 2.9% above that
Federal income tax: At your marginal rate on your total income for the year
No Texas state income tax: That’s an actual advantage of Texas

The key part that everyone misses: you owe taxes on your LLC’s net profit regardless of what you drew. Drawing less money doesn’t lower your tax bill.

If your business made $100,000 net profit and you only drew $60,000, you still owe tax on $100,000. The IRS doesn’t care what amount hit your personal account.

Recording It Correctly

Owner’s draws reduce your equity. They’re not business expenses. This is critical.

I’ve seen more bookkeeping mistakes on this than anything else. An owner records the draw as an expense. Suddenly their profit is understated. Their financial statements are wrong. The IRS gets suspicious.

Record every draw as a reduction in owner’s equity. That’s it. Not an expense. Not a salary. Just equity going down.

Salary Method: For S-Corp LLCs

If your LLC elected S-Corp status, the rules change completely.

The Requirement

S-Corp owners who work in the business must pay themselves a salary through payroll. This is required. Not negotiable. The IRS doesn’t bend on this.

What “Reasonable” Means

The IRS looks hard at S-Corp salaries. They check what your role makes in your industry, your experience, how many hours you actually work, how much profit the business generates, and what Houston pays for that job versus rural Texas.

I had a client in Montrose generating $150,000 net profit but paying himself $40,000 salary. The IRS would have come down hard on that. A full-time owner generating that income needs to take a real salary.

The Mechanics

With an S-Corp election, this is what happens:

You run payroll. In-house or through a service.
You withhold federal tax, Social Security, and Medicare from your salary.
You pay the employer portion of FICA.
You file Form 941 every quarter.
You get a W-2 at year-end like any employee.
Any profit left over comes out as a distribution. No SE tax on that.

Why Bother? The Tax Savings

Here’s the payoff. Your salary pays FICA taxes. Your distributions don’t. That’s the whole strategy.

Real example at $120,000 net profit:

As a standard LLC:

Self-employment tax on $120,000: $18,360
You pay tax on all the profit

As an S-Corp with a $60,000 salary and $60,000 distribution:

Payroll tax on the salary: $9,180
The distribution gets zero SE tax
You save $9,180 per year

That’s money in your pocket. Enough to fund a 401k or buy equipment for your business.

Guaranteed Payments: Multi-Member LLCs

If your LLC has multiple members and is taxed as a partnership, you might use guaranteed payments.

How They Work

Guaranteed payments are fixed amounts paid to a partner for their work. They don’t depend on whether the business made money that year.

The partner pays self-employment tax and income tax on the payment. The business deducts it as an expense.

When to Use Them

You use guaranteed payments when one partner does significantly more work than the other, when partners need predictable monthly income, or when you want compensation separate from profit splitting.

Common Mistakes That Create Problems

Mistake 1: Treating Draws as Expenses

I see this constantly. An owner records a draw as a business expense. Now their profit is wrong. Their tax return is wrong. The IRS notices.

Your personal draw is not an expense. Period. Record it against owner’s equity.

Mistake 2: Not Setting Aside Taxes

With draws, nothing is withheld. You’ll spend the money and April arrives with a bill for $25,000 you didn’t budget.

Set aside 25 to 35 percent of your net profit for quarterly tax payments. Do this every time you draw money. Not later. Now.

Mistake 3: Commingling Funds

An LLC protects you from liability. Unless you mix personal and business finances. Then you’ve just given that protection away.

Always move money from business account to personal account first. Then spend from personal. Never pay personal bills directly from the business account. I’ve watched owners in the Memorial area lose their entire liability shield because they didn’t follow this rule.

Mistake 4: Ignoring Quarterly Estimates

If you’ll owe $1,000 or more in federal taxes, you must send quarterly estimated payments. Skip these and you’ll pay penalties and interest on top of the taxes.

2025 Quarterly Due Dates:

Q1: April 15, 2025
Q2: June 16, 2025
Q3: September 15, 2025
Q4: January 15, 2026

Mistake 5: Setting S-Corp Salary Too Low

The IRS is auditing S-Corps with unreasonably low salaries. They see the pattern. Owner makes $150,000 profit but takes $30,000 salary.

That salary savings isn’t worth the audit. Reasonable compensation means reasonable compensation.

Which Method Makes Sense for You?

Annual Net Profit	Typical Approach
Under $40,000	Owner’s draw (standard LLC)
$40,000-$80,000	Evaluate S-Corp election carefully
Over $80,000	S-Corp election often beneficial

S-Corp election costs you $1,500 to $3,000 per year in payroll processing and tax filing. The tax savings need to beat that cost.

At $50,000 profit, you might save $2,000 to $3,000. That’s basically a wash with your compliance costs.

At $120,000 profit, you save $8,000 to $9,000. That’s clear money ahead.

Get numbers from a CPA before you decide. Don’t guess.

Texas-Specific Considerations

Texas has no state income tax. That’s real. But don’t get complacent.

Texas Franchise Tax: If your revenue hits $2.47 million (2025), you start paying franchise tax. Most small businesses never reach that.

Payroll compliance: Texas still requires unemployment insurance on payroll even though there’s no income tax.

Liability protection: Keep your draws documented. Keep business and personal separate. Your LLC only protects you if you treat it like a real business.

Getting This Right From the Start

I’ve seen the damage from paying yourself wrong. Your books become a mess. Your tax returns don’t match your bank statements. The IRS sends notices you don’t understand.

Over a decade I’ve worked with owners across Houston, from Spring to the Energy Corridor to Memorial, fixing these problems. Some took years to untangle.

At EZQ Group, we get the structure right the first time. Whether you’re picking an LLC tax election or setting up S-Corp payroll, we build it to work.

This article provides general information and is not tax advice. Tax situations vary, and you should consult with a qualified tax professional about your specific circumstances.