There are really only two ways to get money out of your Arizona LLC and into your own pocket: an owner's draw or a W-2 salary paired with distributions under an S-corp election. Which one costs you less in tax has nothing to do with preference and everything to do with how much profit your LLC makes. This guide walks through both methods, the Arizona-specific pieces you need in place first, and a real dollar comparison.
Key Takeaways
- A default LLC pays its owner through an owner's draw, not a paycheck. There's no withholding, and the owner pays federal self-employment tax of 15.3% on all net profit.
- An S-corp election splits your income into W-2 salary and separate distributions. Only the salary portion is subject to FICA; the distributions aren't.
- The IRS requires "reasonable compensation" for that salary, based on facts and circumstances. There's no official 50/50 or 60/40 formula, despite what you'll read elsewhere.
- You need an EIN, Articles of Organization, and a statutory agent in place before any of this matters. Newly formed LLCs also owe a newspaper publication unless the statutory agent is in Maricopa or Pima County.
- Arizona's flat 2.5% individual tax applies to your profit either way, whether you take an owner's draw or run an S-corp payroll. The savings from an S-corp election are entirely on the federal side.
What you need in place before you can pay yourself anything
Before the draw-versus-salary question even applies, your LLC has to actually exist on paper. That means filing Articles of Organization with the Arizona Corporation Commission ($50 standard, $85 for same-day approval), naming a statutory agent with an Arizona address, and getting an EIN directly from the IRS at no cost. Newly formed LLCs also have to publish a notice in a newspaper within 60 days, unless your statutory agent's address is in Maricopa or Pima County, in which case the ACC posts the notice online instead and you skip the newspaper entirely.
One requirement that used to apply here no longer does. Since March 2025, FinCEN exempts all U.S.-formed companies from Beneficial Ownership Information (BOI) reporting under the Corporate Transparency Act. If you formed your Arizona LLC domestically, you currently have no BOI filing obligation, though FinCEN has signaled this rule could still change, so it's worth a periodic check rather than a permanent assumption.
Once the LLC exists, a well-drafted operating agreement should spell out how and when owners take money out, which matters more than people expect once there's more than one member involved. With that in place, you're ready for the actual question: draw or salary?
The default method: owner's draw
If your LLC hasn't elected any special tax treatment, the IRS treats it as either a disregarded entity (single member) or a partnership (multiple members) by default. In both cases, you don't get a paycheck. You simply transfer money from the business account to your personal account whenever you need it, and that transfer isn't a deductible business expense, isn't subject to withholding, and isn't taxed as a separate event. What's actually taxed is your share of the LLC's net profit for the year, whether you withdrew it or left it in the business.
Multi-member LLCs have a related concept called a guaranteed payment: a set payment to a partner for services or capital that's determined without regard to the partnership's income. Guaranteed payments are deductible to the partnership and taxable to the recipient, but they still aren't W-2 wages and don't involve payroll withholding. Either way, tracking what each owner draws throughout the year is a bookkeeping habit worth building early, since messy records make year-end tax prep and any future entity change much harder to sort out.
The cost of the default method: self-employment tax
Here's the part that surprises a lot of new LLC owners. Because there's no employer to pay half of your Social Security and Medicare taxes, the IRS collects self-employment tax at 15.3% on 92.35% of your net earnings if you're a sole proprietor, single-member LLC owner, or general partner. This applies on top of your regular federal income tax, not instead of it, and it applies to the LLC's entire profit, not just what you actually withdrew as a draw.
This is the specific cost that an S-corp election is designed to reduce.
The S-corp election: splitting salary and distributions
An S-corp isn't a different type of entity, it's a tax election your LLC can make with the IRS using Form 2553, generally filed within two months and 15 days of the start of the tax year you want it to apply to (or any time during the prior year). Once elected, you become a W-2 employee of your own LLC for tax purposes. You run payroll, withhold and pay FICA on your salary, and take the rest of the year's profit as a distribution that isn't subject to self-employment tax or FICA at all.
That's the entire mechanism behind the tax savings: FICA only applies to the salary piece, not the full profit.
How much salary is "reasonable"?
The IRS's own guidance on paying yourself says wages paid to a corporate officer should be "commensurate with your duties," and its more detailed guidance on S-corp compensation issues lists the factors examiners actually weigh: training and experience, duties and responsibilities, time devoted to the business, what comparable businesses pay for similar work, and distribution history.
There is no official percentage rule. You'll see "pay yourself 60% salary and 40% distributions" repeated across the internet as if it were IRS guidance; it isn't. It's informal industry practice, not a safe harbor, and the IRS has successfully challenged S-corp owners in court for paying themselves too little relative to the value of their work, regardless of what ratio they used.
A real example: $150,000 in LLC profit, two ways
Assume your LLC nets $150,000 in profit this year and you're the sole active owner.
As a default LLC (owner's draw): You'd owe roughly $21,190 in federal self-employment tax (15.3% on $138,525, which is 92.35% of $150,000), on top of ordinary federal income tax and Arizona's flat 2.5% on the full amount.
As an S-corp with a $70,000 reasonable salary and an $80,000 distribution: FICA applies only to the $70,000 salary, at the combined 15.3% (split employer and employee), for a total of $10,710. That's roughly $10,480 less than the self-employment tax bill under the default structure. Arizona's 2.5% still applies to the full $150,000 either way, and federal income tax still applies to the full amount regardless of structure.
The catch is that $70,000 has to genuinely reflect fair compensation for the work involved, and running payroll adds real cost: payroll software or a service, quarterly filings, and typically a bit more in tax prep fees. Common professional guidance places the practical break-even point for an S-corp election somewhere around $40,000 to $60,000 of consistent net profit, though that's a general range to evaluate with a tax professional rather than a rule that applies identically to every business, whether you're running a service company in Phoenix or a contracting business anywhere else in the state. This calculation is worth running with an advisor using your actual numbers rather than a generic example.
When the S-corp election isn't worth it
A few situations where the math often doesn't favor an S-corp election:
- Inconsistent or seasonal profit. Payroll costs and reasonable-comp obligations don't pause when revenue dips, so a business with volatile income takes on fixed costs it may not always be able to justify.
- High-income service businesses near the QBI phase-out. S-corp wages reduce your Qualified Business Income deduction, and for 2026 the QBI wage-and-property limitation begins phasing in around $201,000 of taxable income for single filers and roughly $403,500 for joint filers, so the interaction needs modeling rather than assuming.
- Rental real estate held in an LLC. This is the big one for real estate investors. Rental income is generally passive and isn't subject to self-employment tax in the first place, whether the LLC is taxed as a disregarded entity, a partnership, or otherwise. An S-corp election doesn't save SE tax you weren't paying, and it can complicate how appreciated property and distributions are handled. Most rental LLCs have no reason to make this election at all.
If you're not sure which category your business falls into, that's a conversation worth having before filing Form 2553, not after.
The Arizona-specific pieces
Two things stay constant regardless of how you pay yourself. First, Arizona's flat 2.5% individual income tax applies to your share of LLC profit whether it comes through as a draw, a guaranteed payment, or S-corp wages and distributions combined. Second, the LLC itself owes the Arizona Corporation Commission nothing annual: no annual report, no annual fee, and no franchise tax, a rule that surprises people used to how corporations are treated.
One Arizona-specific planning tool worth knowing about: the Pass-Through Entity (PTE) election, which lets a partnership or S-corp pay Arizona tax at the entity level (2.5%) instead of passing it through to owners' individual returns. For owners affected by the federal SALT deduction cap, this election can restore some of that federal deductibility. Whether it makes sense depends on your specific numbers, not a blanket recommendation. None of this changes whether your LLC owes Transaction Privilege Tax on what it sells, which is a separate question tied to what the business does, not how you pay yourself.
Getting the structure right from the start
The gap between an owner's draw and an S-corp election isn't cosmetic, it's the difference between paying self-employment tax on your entire profit and paying FICA on just a defensible salary. But the election only pays off past a certain profit level, only works if the salary you set can survive scrutiny, and doesn't apply the same way to every kind of LLC, particularly rental real estate. K&R's CPAs and Enrolled Agents walk Arizona LLC owners through this decision regularly, comparing the real numbers rather than a rule of thumb.
Talk to K&R about whether an S-corp election makes sense for your specific LLC, or whether you're better off staying with a default draw for now. If you do move to an S-corp structure, payroll needs to run correctly and consistently from day one, since inconsistent payroll is one of the fastest ways to undermine the election if it's ever questioned. Book a consultation and we'll run the numbers for your actual profit, not a generic example.
Frequently asked questions
Can I just transfer money from my LLC's bank account whenever I want? If your LLC is taxed as a default disregarded entity or partnership, yes. Owner's draws aren't tied to a schedule or a specific dollar amount. You're taxed on your share of the LLC's annual profit regardless of when or how much you actually withdrew, not on each individual transfer.
Do I need to run payroll to pay myself from an LLC? Only if your LLC has elected S-corp (or C-corp) tax treatment. A default LLC owner takes draws with no payroll or withholding involved. Once you elect S-corp status, the IRS requires you to be paid a reasonable W-2 salary through actual payroll.
How much can I pay myself from my LLC without owing self-employment tax? Under default LLC taxation, all of your net profit is subject to 15.3% self-employment tax; there's no threshold you can stay under to avoid it. The only way to reduce that exposure is an S-corp election, which limits FICA to your salary rather than your full profit.
What's the difference between an owner's draw and a guaranteed payment? An owner's draw applies to single-member LLCs and simply reflects a share of profit. A guaranteed payment is specific to multi-member LLCs taxed as partnerships: a set payment to a partner for services or capital, determined independent of the partnership's overall income, and deductible to the partnership.
Should a rental property LLC elect S-corp status to save on self-employment tax? Usually not. Passive rental income generally isn't subject to self-employment tax to begin with, regardless of entity tax treatment, so there's typically no SE tax to save. An S-corp election on a rental LLC can add complexity around distributions and property basis without a matching tax benefit.
What's a reasonable S-corp salary for a small Arizona LLC? There's no fixed percentage or dollar figure. The IRS looks at your duties, training, time devoted to the business, and what comparable roles pay in your market. Documentation of how you arrived at the number matters more than hitting any particular ratio.
