How to Pay Yourself From Your LLC
The Truth About The 60/40 Rule
If you’ve heard “just pay yourself 60% salary and 40% distributions,” you are risking an IRS audit.
70% of LLC owners pay themselves the wrong way. Not because they are trying to cheat the system – but because TikTok finance gurus never explain the difference between an LLC, an S-Corp, and what the IRS actually wants to see.
In our latest 20-minute documentary, we break down exactly how smart LLC owners pay themselves legally in the United States without piercing the corporate veil or triggering an S-Corp audit.
What You Will Learn In This Guide
Secret #1: Your LLC Does NOT Pay You a Salary
This is the biggest mistake we see.
By default, a single-member LLC is a disregarded entity for federal tax purposes. The IRS doesn’t see it as separate from you. Under IRC Section 1402 and Rev Rul 59-221, you cannot be a W-2 employee of your own disregarded LLC.
If you pay yourself a salary without an S-Corp election, you have done nothing for taxes – you still pay self-employment tax on everything. You just created extra paperwork.
To pay yourself a salary, your LLC must first elect to be taxed as an S-Corporation by filing Form 2553. Only then are you both a shareholder AND an employee.
LLC (Default) vs. LLC Taxed as S-Corp
Default LLC: Owner’s Draw only. All profit subject to 15.3% self-employment tax. No W-2.
LLC Taxed as S-Corp: W-2 salary + distributions. Only salary subject to payroll tax. Distributions are not.
Secret #2: The 60/40 Rule is NOT Law
There is no IRS rule, statute, or regulation that says 60/40. It’s not in the Internal Revenue Code. It’s not in Treasury Regulations.
The 60/40 rule came from old CPA shortcuts and got viral on social media because it’s easy to remember. The real law is Reasonable Compensation under IRC 3121 and Treas. Reg. 1.162-7.
If you make $100k in profit and take $60k salary just because of a TikTok video, but a person doing your job in your state would normally make $85k, your 60/40 split is unreasonable and a major audit red flag. The IRS can reclassify all your distributions as wages and charge back payroll taxes + penalties.
Secret #3: How the IRS Actually Decides Your Salary – The 9 Factors
Per IRS Fact Sheet 2008-25 and court cases, the IRS uses these 9 factors to determine reasonable compensation:
- Training and Experience
- Duties and Responsibilities
- Time and Effort Devoted to the Business
- Dividend History
- Payments to Non-Shareholder Employees
- Timing and Manner of Paying Bonuses
- What Comparable Businesses Pay – This is where BLS Wage Data and RCReports come in
- Compensation Agreements
- Use of a Formula for Determining Compensation
You need to document this. A screenshot of a salary calculator is not enough. You need a formal Reasonable Compensation Report.
Secret #4: The 5-Document Bulletproof Stack
If you are an LLC taxed as an S-Corp, you need these 5 files in your corporate records. This is what makes you bulletproof if you get a CP2000 notice.
- Form 2553 – Election by a Small Business Corporation
The filing that elects S-Corp status. Must be filed within 2 months and 15 days of your tax year start, with late relief under Rev Proc 2013-30. - Shareholder Resolution for Officer Compensation
A signed corporate resolution by the shareholders approving your salary and how it was determined. Shows corporate formalities. - Reasonable Compensation Report Checklist
Your defense file. Includes BLS wage data, RCReports or similar comps, and the 9-factor analysis. This proves your salary is reasonable. - W-2 and Form 941 Filings
You must run payroll, file quarterly 941s, and issue yourself a W-2. Distributions alone without payroll is the #1 S-Corp audit trigger per GAO Report 10-195. - Accountable Plan under Treas. Reg. 1.62-2
The document that lets your S-Corp reimburse you for home office, mileage, phone, and health expenses tax-free. Without it, those reimbursements are considered taxable wages.
[DOWNLOAD BUTTON: Get The Free Paperwork Stack – Templates + Checklist]
Secret #5: How to Actually Move Money Without Piercing the Veil
Lawyers in CA, TX, FL, and NY don’t care about your 60/40 split. They care if you treat your LLC like a personal piggy bank.
Salary: Business Checking -> Payroll Provider -> Your Personal Checking (with paystub)
Distribution: Business Checking -> Personal Checking ONLY with a signed Distribution Resolution
Reimbursement: Business Checking -> Personal Checking ONLY with an expense report under your Accountable Plan
Never pay for groceries directly from your business account. Never transfer money with the memo “for me.” That’s how they pierce the corporate veil.
Secret #6: QBI vs. Solo 401(k) – Why 60/40 Costs You Thousands
This is what CPAs don’t explain.
Lower Salary = Higher QBI Deduction (199A) but Lower Solo 401(k) Contribution. Your Solo 401(k) employee deferral is capped by your W-2 salary.
Higher Salary = Lower QBI Deduction but Higher Solo 401(k) Limit.
The 60/40 rule ignores this tradeoff. The optimal salary is a calculation based on your total profit, tax bracket, and retirement goals – not a fixed percentage. For many owners in 2026, a 70/30 or even 50/50 is mathematically better.
Secret #7: 5 Red Flags That Trigger S-Corp Audits in 2026
Based on the IRS NRP Study 2021 and current enforcement:
- $0 Salary, All Distributions
- Same Exact Salary Year After Year – No reasonable comp report would stay flat while profits double.
- Salary Below BLS 25th Percentile for Your Role/Zip Code
- No Payroll Filings, Only Year-End Distributions
- Large, Round-Number Distributions with No Resolutions
Your 7-Step Action Plan This Week
Confirm your S-Corp election status – Did Form 2553 get accepted?
Pull BLS wage data for your actual job title in your state.
Draft your Reasonable Compensation Report using the 9 factors.
Sign a Shareholder Resolution for Officer Compensation.
Set up payroll – even if it’s just for yourself.
Adopt a written Accountable Plan.
Open separate accounts and start using Distribution Resolutions.
Statutes & Studies Referenced in This Video:
IRC Sections 1402, 3121, 1361, 199A | Treasury Regulation 1.162-7, 1.62-2 | Rev Rul 59-221 | IRS Fact Sheet 2008-25 | Rev Proc 2013-30 | IRS NRP Study 2021 | GAO Report 10-195 | BLS Wage Data
Next Week on Micro Biz Legal and Growth:
Single-Member LLC is Getting Sued – Can They Take Your House? We reveal how lawyers actually pierce the veil in California, Texas, Florida, and New York and what actually protects you.
Who We Are:
Welcome to Micro Biz Legal and Growth. I’m Shameem and this is Emma from the USA. We help micro businesses and international founders build legally bulletproof businesses in America without wasting money on bad advice.
If this guide saved you money, share it with another founder.
Tags: LLC, S-Corp, How to pay yourself from LLC, 60/40 rule, reasonable compensation, small business taxes
Educational Disclaimer: This article and video are for educational and informational purposes only and are not legal, tax, or financial advice. The information provided is general in nature and may not apply to your specific situation. Laws and IRS regulations change and vary by state. You should consult with a qualified attorney, CPA, or tax advisor licensed in your state before making any business, tax, or legal decisions. Micro Biz Legal and Growth, Shameem, and Emma are not your attorney or CPA and no attorney-client relationship is created by reading this article or watching this video. We do not guarantee any specific outcome or protection from audit or lawsuit.