How you take money out of your Delaware LLC—owner’s draw or salary through payroll—directly affects federal taxes, self-employment contributions, and even your 20 % QBI deduction. This 2025-ready guide explains the rules for single-member and multi-member LLCs, plus what changes if you later elect S-Corp status.
Relevant IRC Codes & Definitions
| Code | Why It Matters to Owner Compensation |
|---|---|
| IRC § 1402 | Imposes 15.3 % self-employment (SECA) tax on pass-through LLC earnings. |
| IRC § 3121 | Defines FICA payroll taxes (Social Security + Medicare) on wages. |
| IRC § 199A | Allows 20 % QBI deduction on qualified LLC income—reduced by owner’s wages. |
| IRC § 1361/1362 | Governs S-Corp elections (Form 2553) that enable salary + dividends strategy. |
| IRC § 162 | Ordinary and necessary business expenses—wages are deductible to the LLC. |
IRS & State Form References
| Goal | Draw | Salary |
|---|---|---|
| Federal Return | Schedule C (single-member) or Form 1065 K-1 (multi-member) | Form 941 (quarterly payroll) + W-2 |
| Self-Employment Tax | Calculated on Schedule SE | FICA withheld & remitted via Form 941 |
| Delaware Reporting | No change; LLC still owes flat $300 tax | Same $300; plus DE withholding if employees reside in DE |
| S-Corp Election (optional) | Not required | File 2553 to pay part of profit as wages |
Real-World Example (2025)
| Metric | Draw (Default LLC) | Salary (S-Corp Election) |
|---|---|---|
| Net Profit | $150,000 | $150,000 |
| Owner Salary | — | $80,000 W-2 |
| SE Tax / FICA | $22,950 SECA | $12,240 FICA (both sides) |
| QBI Deduction* | $30,000 | $14,000 (20 % of residual $70k) |
| Fed. Income Tax (22 %) | $26,400 | $19,800 |
| Total Fed. + Payroll Tax | $49,350 | $44,040 |
*Subject to QBI phase-outs and wage limitations.
Step-by-Step: Choosing Draw or Salary
- Estimate Annual Profit.
- Run SE Tax vs. Payroll Tax on projected salary.
- Elect S-Corp (Form 2553) if salary strategy saves ≥$2 k after payroll costs.
- Set “Reasonable Compensation.” Use industry benchmarks; too low invites IRS audits.
- Register Payroll—EIN, Form 941, Form W-2, state IDs as needed.
- Withhold & Remit FICA / FED & State Income Tax quarterly.
- Issue Owner’s Draws from after-tax retained earnings (if S-Corp) or anytime (if default LLC).
Conclusion
- Sole owners with modest profit (<$70 k): simple draw often beats payroll hassle.
- Profits above $100 k: S-Corp salary split typically wins after SECA savings, even with payroll costs.
- Always document “reasonable salary”; the IRS targets zero-salary S-Corps.
Call to Action
Unsure whether to stay pass-through or elect S-Corp and run payroll?
👉 Book a personalized comp strategy session with Anshul Goyal, CPA. We’ll model SE tax vs. payroll, set your salary, and file the right forms—stress-free.
Disclaimer
This content is for informational purposes only and is not legal or tax advice. The optimal mix of salary and draws depends on profit, state nexus, and shareholder participation. Tax laws and rates may change. Consult a licensed CPA before electing S-Corp status, setting compensation, or filing payroll returns.
Anshul Goyal, CPA EA FCA is licensed in the U.S., admitted before the IRS, and a Chartered Accountant in India. He guides SaaS founders in entity taxation, payroll setup, and cross-border compliance.
FAQs (Top 5 High-Searched)
1. Do I pay self-employment tax on draws?
Yes—100 % of LLC profit is subject to SE tax unless you elect S-Corp and take wages.
2. What is “reasonable salary” for S-Corp owners?
Comparable to what you’d pay an employee for similar work—use BLS or industry data.
3. Can I switch to S-Corp mid-year?
Yes—file Form 2553 within 75 days of the effective date.
4. Does the $300 Delaware LLC tax change after S-Corp election?
No—the state fee remains $300.
5. Are draws still allowed after S-Corp election?
Yes—from after-tax profits, distributed as dividends.
About Our CPA
Anshul Goyal, CPA EA FCA has helped 2,000+ founders optimize compensation, saving over $200 million in payroll and SE taxes while ensuring IRS-proof documentation.