Are You Paying Yourself Correctly? What LLC and S-Corp Owners in Illinois Need to Know

A lot of small business owners either don’t pay themselves at all, or pull random amounts whenever they need cash. Both approaches create tax problems. And depending on your business structure, one of them can trigger an IRS audit.

How you pay yourself isn’t just a preference, it’s a compliance issue.

It Depends on Your Business Structure

Sole Proprietor or Single-Member LLC

You take an owner’s draw – a direct transfer from your business account to your personal account. There’s no payroll, no W-2, and no withholding. You pay self-employment tax (15.3%) and income tax on your net business profit at year-end, regardless of how much you actually drew out.

Multi-Member LLC

Treated as a partnership for tax purposes. Each member takes draws, and profit is allocated according to the operating agreement. No payroll required unless you’ve elected S-corp status.

S-Corp Owner

This is where it gets complicated and where most mistakes happen. If you’re an S-corp owner who actively works in the business, you are required by the IRS to pay yourself a reasonable salary through payroll. You can also take additional distributions, but those come after your salary.

Why does this matter? Because S-corp distributions aren’t subject to self-employment tax, which is where the tax savings come from. But the IRS watches S-corps specifically for owners who take zero salary and 100% distributions to avoid payroll taxes. That’s a red flag that can trigger an audit.

What’s a ‘Reasonable’ Salary?

There’s no exact formula, but it should reflect what you’d pay someone else to do your job. If your business generates $300,000 and you pay yourself $18,000, that’s going to draw scrutiny. Document how you arrived at your salary number — industry data, your role, hours worked.

Common Costly Mistakes

• S-corp owners skipping payroll entirely and only taking distributions
• LLC owners not setting aside self-employment tax on draws
• Taking irregular amounts with no record of the payment type
• Mixing owner payments with regular business expenses in the books

At JIL & Associates, we specialize in bookkeeping and tax planning for LLC and S-corp owners across the Chicago area. We’ll help you make sure you’re paying yourself the right way  and keeping the IRS out of your books.

📞 Call (630) 828-3648 or visit jiladvisors.com to schedule a free consultation.