By Gruv Editorial Team
You did it. You pushed through the paperwork, picked the perfect name, and your LLC is officially a real thing. It’s a huge milestone for any freelancer, and you should absolutely take a moment to celebrate.
But after the initial excitement wears off, a very practical—and often confusing—question bubbles up. "Okay, my client payments are going into this new business bank account... so how do I actually, you know, pay myself?"
If you're feeling a little lost here, you're not alone. This is one of the most common hurdles we face when we formalize our businesses.
Let's cut right through the noise. This guide is your practical blueprint for getting paid. We’ll demystify the process, break down the different methods, and explain the tax implications in plain English. Forget the jargon and the dense legal articles; this is the conversation we’d have over coffee.
Here’s what you need to understand from the get-go:
Alright, let's talk about the most straightforward way to get paid. For most new freelancers with a standard LLC, this is your starting point.
Imagine your business bank account is a big, beautiful well, slowly filling up with rainwater every time a client pays you. Your personal bank account is the bucket you use to get water for your house. An owner's draw is simply you dipping that bucket into the well whenever you need to pay your rent or buy groceries. It’s a direct transfer. Simple as that.
If your LLC is the default kind—a single-member LLC or a partnership—this is your method. You're the owner, and you're "drawing" funds from your business. There's no complex payroll to run. No formal salary. You just move the money when you need it.
But here’s the part that trips up almost everyone at first. This is critical.
An owner's draw is not a salary, and the amount you draw has zero impact on how much tax you owe. Let that sink in. The IRS taxes you on your LLC’s total net profit for the year, regardless of whether you took out $5,000 or $50,000 in draws.
Think of it this way: Your freelance business earned $80,000 in profit last year. You were frugal and only transferred $45,000 to your personal account to live on, leaving a healthy $35,000 cushion in the business account. When it comes to taxes, the IRS doesn't care about the $45,000 you drew. They see the entire $80,000 profit as your personal income for the year. That's the number you'll pay income and self-employment taxes on.
Why? Because with a default LLC, the IRS sees you and the business as the same taxpayer. Your business's profit is your profit. This means the responsibility for handling taxes falls squarely on your shoulders.
Here’s the bottom line:
Alright, let's talk about the next level. Your freelance business is hitting its stride, the profits are consistent, and you're starting to wonder if there’s a smarter way to handle your money. What if you could pay significantly less in self-employment tax as your income grows?
This isn't some shady loophole. It’s a strategic business structure called the S-Corp election, and it's the primary reason successful freelancers change how they get paid.
Think of it this way. Right now, as a standard LLC owner, you're wearing one hat: "The Business." The IRS taxes all profit that "The Business" makes with that hefty 15.3% self-employment tax.
Electing to be taxed as an S-Corporation lets you wear two hats:
This is a huge deal. That’s a direct saving that goes right back into your pocket.
Now, before you rush off to file the paperwork, let's be real. This strategy isn't for everyone. It comes with more complexity. You have to actually run payroll, which usually means paying for a service like Gusto or QuickBooks Payroll. You have to determine and justify that "reasonable salary"—what would you pay someone else to do your job? You can't just pay yourself a $1 salary and take the rest as a distribution; the IRS is wise to that.
This is a move you make when your business has predictable, substantial profits. It’s for when the tax savings will easily outweigh the new administrative costs and effort.
Alright, let's get down to brass tacks. You’ve decided how to pay yourself—draw or salary. But what does that actually look like on a random Tuesday afternoon when you need to pay your rent? Do you just open your business banking app and Venmo the money to yourself with a pizza emoji?
Please, don't do that.
The mechanics of moving your money are just as critical as the method you choose. Think of your LLC as a fortress you’ve built to protect your personal assets—your home, your car, your savings—from anything that could go wrong in your business. This legal separation is often called the "liability shield." Every time you casually use your business debit card for groceries or pay yourself with an undocumented transfer, you're poking a tiny hole in that fortress wall. Poke enough holes, and the whole thing can come crumbling down, leaving you personally exposed.
This is why we have one golden rule: Maintain a strict separation between your business and personal finances.
It’s not just a suggestion; it’s the foundation of your legal protection. In practice, this is incredibly simple, but it requires discipline. You need to treat your business like a separate entity, because legally, it is.
Here’s your simple, non-negotiable process:
Look, I get it. When you're a one-person shop, this can feel a bit silly, like you're just moving money from your right pocket to your left. But you’re not. You're creating an irrefutable paper trail that proves to your accountant, and potentially the IRS, that you are running a legitimate, professional operation.
Clean, consistent bookkeeping isn't just "good practice." It’s your best defense. It's what makes your LLC's legal shield strong.
Alright, deep breath. We’ve just covered a lot of ground, but you’re no longer staring at a blank page. You have the map. You understand the difference between a simple draw and a strategic salary. Now, it's go-time. This is the moment you turn all that information into a confident financial system for your business.
Your immediate task is to be brutally honest about where you are right now. Are you just starting out, trying to build momentum? Or are your profits starting to climb in a way that makes you think, "Wow, this is really working"? The answer dictates your next move. If you're in the first camp, your focus is on discipline—mastering the clean owner's draw and airtight bookkeeping. If you're in the second, it’s time to talk strategy—specifically, whether an S-Corp election is your next big move.
Here’s your immediate, actionable to-do list.
Honestly? As often as you need to. One of the best parts of the standard LLC structure is its flexibility. If you land a huge project and want to take a large draw one month, you can. If things are slower the next and you only need to cover basic bills, that’s fine too.
There is no legally required schedule. The only real rule here is a practical one: you can only draw money that the business actually has. Don't drain your business account to zero. Always make sure you have enough cash on hand to cover taxes, software subscriptions, and other operating expenses. Think of it less like a rigid payday and more like responsibly transferring funds when the business cash flow can support it.
This is the big one, and getting it right is crucial. The IRS is serious about this.
Think of it this way: Imagine you got hit by a bus tomorrow (morbid, I know, but stay with me). Your business still has to run. What would you have to pay someone with your skills and experience to step in and do your exact job? That figure is your reasonable salary.
It’s not just a number you guess. It's a figure you can defend. To find it, you need to do some real-world research:
This salary is your first line of defense if the IRS ever comes knocking. It proves you’re not just trying to dodge taxes by calling all your income a "distribution."
Absolutely not. In fact, you shouldn't.
Leaving money in your business account is one of the smartest things you can do as a freelancer. This isn’t "lost" money; it’s your business’s financial foundation. It’s the cash buffer that lets you weather a slow month without panic. It’s the fund you’ll use to invest in a new computer, a great course, or a marketing campaign that lands you bigger clients.
Just remember the crucial point for a standard LLC: you are taxed on the total business profit for the year, whether you take it out or not. So, leaving money in the account doesn’t change your tax bill, but it does make your business healthier and more resilient.