One of the most common questions Arizona LLC owners ask is: How do I pay myself from my LLC? It seems like a simple question, but the answer has significant tax consequences — and getting it wrong can cost you thousands of dollars every year.

This article explains exactly how single-member Arizona LLC owners pay themselves, why distributions can be expensive from a tax standpoint, and when it makes sense to elect S-Corporation status to reduce your self-employment tax burden.

What Is a Single-Member Arizona LLC?

When you form a single-member LLC in Arizona, you are the sole owner — the only "member." Arizona LLCs are governed by the Arizona Limited Liability Company Act, A.R.S. § 29-3101 et seq. Your LLC is a separate legal entity that shields your personal assets from business liabilities.

For federal income tax purposes, however, the IRS treats a single-member LLC as a disregarded entity — meaning the LLC itself pays no federal income tax. All profit and loss flows directly to your personal tax return on Schedule C, exactly as if you were a sole proprietor.

Your LLC has its own Employer Identification Number (EIN), which you use to open a business bank account and keep your business finances separate from your personal finances.

How Single-Member LLC Owners Pay Themselves: Distributions

When you move money from your LLC business bank account to your personal bank account, that transfer is called a distribution. There is no formal payroll process, no W-2, and no pay stub. You simply transfer the money.

Here is the important tax rule: distributions are not tax-deductible by the LLC. The IRS does not allow a single-member LLC to deduct money paid to its sole owner as a business expense. This is because the owner and the LLC are the same taxpayer for federal income tax purposes.

This means if your LLC has $100,000 in net profit, the IRS taxes you on $100,000 — regardless of whether you transferred all of it to your personal account, none of it, or anything in between. The act of taking a distribution does not reduce your taxable income.

The Self-Employment Tax Problem

Here is where the tax pain becomes real. As a single-member LLC owner, you pay self-employment tax of 15.3% on your net business profit. Self-employment tax covers:

• Social Security tax: 12.4% (on net earnings up to the annual wage base, which is $168,600 in 2024)
• Medicare tax: 2.9% (no income cap; an additional 0.9% applies above $200,000 for single filers)

On $100,000 in net LLC profit, self-employment tax alone is $15,300. You can deduct half of self-employment tax on your personal return as an above-the-line deduction, but you still owe the full amount.

After that, you still owe federal income tax and Arizona state income tax on the remaining income. Here is what the total tax picture looks like on $100,000 net profit as a single-member LLC:

The S-Corporation Solution: Reducing Self-Employment Tax

Once your Arizona LLC's annual net profit consistently exceeds $40,000 to $50,000, many CPAs recommend electing to have your LLC taxed as an S Corporation for federal income tax purposes.

An S-Corp election does not change your Arizona LLC under state law. Your LLC remains an Arizona LLC — it still has the same operating agreement, the same members, and the same liability protection. The only thing that changes is how the IRS taxes it.

How to Make the S-Corp Election

To elect S-Corp taxation, you file two IRS forms:

• Form 2553 — Election by a Small Business Corporation
• Form 8832 — Entity Classification Election

The election must generally be filed within 75 days of the start of the tax year in which you want it to take effect, or by March 15th of that year. Arizona automatically recognizes the federal S-Corp election — there is no separate Arizona state form required.

Important: S-Corp returns are due March 15th, not April 15th. File Form 7004 if you need an extension.

How S-Corp Taxation Works: Salary + Distribution

When your LLC is taxed as an S-Corp, you wear two hats: you are both an owner and an employee of your own company. As an employee, you must pay yourself a reasonable W-2 salary for services you perform. That salary is a deductible business expense for the LLC.

After paying yourself a reasonable salary, the remaining net profit flows through to your personal return as S-Corp distribution income — which is not subject to self-employment tax or FICA payroll taxes. That is where the savings come from.

Reasonable Compensation: What Does It Mean?

The IRS requires that S-Corp owner-employees pay themselves a salary that is "reasonable" for the services they perform. The IRS scrutinizes S-Corps that pay unreasonably low salaries specifically to avoid payroll taxes.

There is no one-size-fits-all number. Reasonable compensation depends on:

• The nature of the work you perform
• Your industry and geographic market
• What you would pay someone else to do the same work
• Your LLC's net profit available for compensation

A practical guideline many tax professionals use: pay yourself at least 30% to 40% of net profit as a W-2 salary, and take the remainder as an S-Corp distribution. Work with your CPA annually to set an appropriate reasonable compensation amount.

Side-by-Side Tax Comparison: LLC vs. S-Corp

Here is a concrete comparison using $100,000 in net profit, with a $40,000 reasonable salary under the S-Corp structure. Your figures will vary based on your deductions and filing status.

Arizona-Specific Considerations

• Arizona flat income tax rate: Arizona's individual income tax rate is a flat 2.5% — one of the lowest in the country. This makes the state tax component relatively predictable.
• No Arizona franchise tax: Arizona does not impose a franchise tax or annual LLC income tax. Arizona LLCs pay a $50 annual report fee to the Arizona Corporation Commission.
• S-Corp recognition: Arizona automatically follows the federal S-Corp election. No separate Arizona form is required.
• Annual report deadline: Arizona LLC annual reports are due on the anniversary of the LLC's formation date.

Key Takeaways

• Single-member Arizona LLC owners pay themselves through distributions — not salary — unless they have elected S-Corp status.
• Distributions are not deductible. You pay self-employment tax of 15.3% on all net LLC profit.
• An S-Corp election allows you to split income between a reasonable W-2 salary (subject to FICA) and a distribution (not subject to FICA), generating significant tax savings.
• The S-Corp election generally makes financial sense once net profit exceeds $40,000–$50,000 per year.
• Reasonable compensation must be set carefully — work with a CPA to determine the right amount each year.
• Always keep your LLC bank account separate from personal finances.

This article is for general informational purposes only and does not constitute legal or tax advice. Tax laws change frequently. Consult a licensed Arizona attorney and a CPA for advice specific to your situation. Richard Keyt is a licensed Arizona attorney (State Bar No. 006206) and does not practice as a CPA. Tax strategy guidance should come from your qualified tax professional.