Should you pay yourself from your LLC and take the tax hit, or loan yourself the money and pay interest instead? Enter your numbers below to see which option costs less.
Your Details
$
Your highest federal income tax bracket
%
0% for states like TX, FL, WY — up to 13.3% in CA
Include self-employment tax (15.3%)
Turn this on for single-member LLCs taxed as sole proprietorships or partnerships. Turn it off if your LLC is taxed as an S-Corp (you already pay yourself a reasonable salary).
Loan Terms
yr
%
Must meet or exceed the IRS Applicable Federal Rate. Auto-suggests a rate based on your loan term — you can override it.
Interest-only = you pay only interest each month, then repay the lump sum at the end. Amortized = you pay down principal + interest monthly, like a standard loan.
Results
Distribution Cost
$0
Loan Cost
$0
You Save
$0 by choosing the loan
Breakdown
Amount
Distribution
Federal income tax
$0
State income tax
$0
Self-employment tax
$0
Total tax cost
$0
Loan
Total interest paid
$0
Tax on interest income ¹
$0
Monthly payment
$0
Total loan cost
$0
¹ Interest you pay to your LLC flows through as pass-through income, so you owe tax on it at your marginal rate.
Month
Payment
Interest
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Cost Comparison
How LLC Loans to Members Work
When you own an LLC, you might assume the only way to access your company's cash is to pay yourself — whether as a distribution, a guaranteed payment, or payroll. But there's a lesser-known alternative: your LLC can loan money directly to you, the member.
An LLC member loan works just like any other business loan, except the borrower and the business owner are the same person. Your LLC issues you a loan with a formal promissory note, a repayment schedule, and — critically — an interest rate that meets or exceeds the IRS Applicable Federal Rate (AFR). You then make regular payments back to the LLC, including interest.
The advantage is straightforward: a loan is not a taxable event. When you take a distribution from a pass-through LLC, that money is taxed as ordinary income (and potentially subject to self-employment tax). When you take a loan, you receive the cash tax-free because you have an obligation to pay it back. The only cost is the interest you pay over the life of the loan.
Key point: The interest you pay to your LLC doesn't disappear — it becomes income to the LLC, which passes through to you on your K-1. So you'll owe income tax on the interest income. This calculator accounts for that by adding the tax-on-interest to the total loan cost.
Requirements for a Valid LLC Member Loan
The IRS scrutinizes loans between related parties. If your loan doesn't look like a real loan, the IRS can reclassify it as a taxable distribution. To keep your loan legitimate, you need:
Written promissory note — Document the loan amount, interest rate, repayment schedule, and maturity date in a formal agreement signed by both parties.
Interest at or above the AFR — The IRS publishes minimum interest rates monthly. Your loan must charge at least this rate, or the IRS will "impute" the interest and treat the difference as taxable income to you.
Actual repayments — You need to make real, documented payments on schedule. A loan with no repayment activity looks like a disguised distribution.
Reasonable terms — The loan should have a definite maturity date and terms that a third-party lender might realistically offer.
Business purpose documentation — While not strictly required, having a stated purpose for the loan strengthens the legitimacy of the arrangement if it's ever questioned.
Distribution vs. Loan: Key Differences
The fundamental difference comes down to whether you're taking money out permanently or temporarily. A distribution reduces your ownership equity in the LLC — it's your share of the profits, and it's taxable in the year you receive it. A loan, by contrast, is a temporary use of the LLC's funds that you'll repay with interest.
With a distribution, you'll owe federal and state income taxes at your marginal rates. If your LLC is taxed as a sole proprietorship or partnership (the default for single-member and multi-member LLCs), you'll also owe self-employment tax of 15.3% on the first $168,600 of net self-employment income for 2025, plus 2.9% Medicare tax on anything above that. The combined employee and employer portions of Social Security and Medicare make SE tax one of the biggest costs of a distribution — and it's the main reason the loan structure can save so much money.
With a loan, you avoid all of those taxes on the withdrawn amount. Your only direct cost is the interest you pay back to the LLC. However, because your LLC is a pass-through entity, the interest income the LLC receives flows through to your personal tax return — so you do end up paying income tax on just the interest portion. Even so, the total cost is typically far lower than the full tax hit of a distribution, especially for larger amounts where the SE tax adds up fast.
Important: This calculator provides estimates for comparison purposes only. Tax situations vary based on your full income picture, filing status, deductions, and other factors. Consult a CPA or tax attorney before structuring LLC member loans, especially for large amounts.
IRS Applicable Federal Rates (AFR) Explained
The Applicable Federal Rate is the minimum interest rate the IRS requires on loans between related parties — including loans between an LLC and its members. The IRS publishes updated AFR rates in a Revenue Ruling at the beginning of every month, and they're divided into three tiers based on the loan's term:
Short-term AFR — For loans with a term of 3 years or less. This rate is generally the lowest of the three tiers and is closely tied to short-term Treasury yields.
Mid-term AFR — For loans with a term of more than 3 years but not more than 9 years. Reflects the yield curve for medium-term government debt.
Long-term AFR — For loans with a term of more than 9 years. Usually the highest rate, tracking long-duration Treasury bonds.
If you charge less than the AFR, the IRS treats the difference between your rate and the AFR as "imputed interest." This means the IRS acts as if the lender (your LLC) received the market-rate interest and the borrower (you) paid it — even though neither actually happened. You'd owe taxes on this phantom income. That's why it's critical to always set your loan rate at or above the current AFR for the applicable term.
The default rates in this calculator are representative placeholders based on recent AFR ranges. Before structuring a real loan, look up the current month's AFR on the IRS website (search for "Applicable Federal Rates" or the monthly Revenue Ruling). The rates change every month based on market conditions, so what's accurate today may not be accurate next month.
Risks and Considerations
While an LLC member loan can save you significantly on taxes compared to a distribution, it's not a free lunch. Understanding the potential downsides will help you decide whether this structure makes sense for your situation.
Recharacterization Risk
The biggest risk is that the IRS reclassifies your "loan" as a taxable distribution. This can happen when the loan lacks proper documentation, charges no interest or below-AFR interest, shows no repayment activity, or has been rolled over and extended repeatedly without meaningful payments. If the IRS determines the arrangement isn't a real loan, you'll owe all the taxes you were trying to defer — plus interest and potentially penalties on top.
Cash Flow Obligation
Unlike a distribution (where the money is yours free and clear), a loan creates a real repayment obligation. You'll need to make regular payments — monthly or quarterly — back to your LLC. If your personal income is inconsistent or you're using the funds for something that won't generate returns, make sure you can actually sustain the payments before committing to a loan structure.
Opportunity Cost to the Business
Money loaned out to you is money the LLC can't use for operations, hiring, inventory, marketing, or growth investments. For smaller LLCs operating on thin margins, a large member loan could strain the business's working capital and limit its ability to take on new opportunities.
State-Specific Rules
Some states have specific rules governing member loans or may treat them differently for state tax purposes. California, for example, imposes a minimum franchise tax on LLCs regardless of income, and some states have unique rules about related-party transactions. Always verify your state's requirements with a local tax professional.
Frequently Asked Questions
Is a loan from my LLC to myself legal?+
Yes, completely legal. The IRS permits loans between an LLC and its members as long as the loan is structured as a legitimate, arm's-length transaction. You need a written promissory note, an interest rate that meets or exceeds the current AFR, a fixed repayment schedule, and you need to actually make the payments. The key is documentation and follow-through — if the loan looks and behaves like a real loan, the IRS will treat it as one.
What happens if I set the interest rate below the AFR?+
If your loan charges less than the Applicable Federal Rate, the IRS will "impute" the missing interest. That means the IRS pretends the loan was made at the AFR rate regardless of what you actually charged. The gap between your actual rate and the AFR is treated as taxable income to the lender (your LLC, which passes through to you). In effect, you owe taxes on interest you never actually collected. The fix is simple: always set your rate at or above the current month's AFR before closing the loan.
Does this strategy work for LLCs taxed as S-Corps?+
Yes, S-Corps can also make shareholder loans with the same AFR requirements. However, the math is different. S-Corp owners who actively work in the business must already pay themselves a "reasonable salary" that's subject to payroll taxes. Distributions above that salary are not subject to self-employment tax. Because of that, the tax savings from structuring a loan instead of a distribution are smaller for S-Corps than for sole proprietorships or partnerships. Use the self-employment tax toggle in the calculator to model both scenarios.
How long can the loan term be?+
There's no hard legal maximum on the loan term. However, reasonableness matters. Very long-term loans — say, 20 or 30 years — without consistent repayment activity will raise red flags with the IRS and significantly increase the risk that the loan is reclassified as a distribution. Most tax advisors recommend keeping loan terms between 1 and 10 years with regular, documented payments. The term you choose also determines which AFR tier applies: short-term for 3 years or less, mid-term for 3 to 9 years, and long-term for anything over 9 years.
Should I choose interest-only or amortized payments?+
It depends on your cash flow and repayment plan. Interest-only payments are lower each month, which keeps more cash in your pocket during the loan term. But you'll owe the full principal as a balloon payment at maturity, and you'll pay more total interest since the balance never decreases. Amortized payments are higher monthly but you chip away at the principal steadily and owe nothing at the end. From a pure cost standpoint, amortized loans are cheaper overall. The IRS doesn't prefer one structure over the other — both are valid as long as you're actually making the scheduled payments.
How do I report a member loan on my tax return?+
The loan principal itself is not reported as income because it's not a taxable event — you're borrowing, not earning. However, the interest income that the LLC earns from the loan is reported on the LLC's informational return (Form 1065 for partnerships, Schedule C for single-member LLCs), and it flows through to your personal return on Schedule K-1 or Schedule C as ordinary income. Keep the promissory note, a payment log, and bank statements showing the transfers in your records in case of an audit. The LLC should also carry the loan as a receivable on its balance sheet.
When does a distribution make more sense than a loan?+
Distributions can be the better choice in several situations: the withdrawal amount is small enough that the tax hit is minimal and doesn't justify the paperwork, your LLC is taxed as an S-Corp (where distributions already skip SE tax), you're in a low tax bracket, you don't want the administrative burden of maintaining a formal loan agreement and making regular payments, or your LLC doesn't have enough retained earnings to support a loan on its balance sheet. This calculator shows the exact dollar difference so you can decide whether the savings justify the extra complexity.