Running your own business doesn’t mean you sit around as stacks of cash come flooding into your office. Business owners are busy nonstop to keep up with operations. Since running a business is your full-time job, you need to know how to pay yourself from your business.
- Your pay method depends on your tax structure: sole prop/single-member LLC = draws; partnership/multi-member LLC = draws or guaranteed payments; S corp = reasonable salary plus distributions; C corp = salary (and possibly dividends).
- Draws and distributions are not payroll and don’t reduce business profit; you’ll generally pay income and, if applicable, self-employment tax on your share of profit.
- S corp owners working in the business must take a reasonable W-2 salary before distributions.
- Use profits, cash flow, and expenses to set a cadence; many owners cap pay at 50% of profits.
- Document your approach in an operating agreement or similar, and record payments correctly in your books.
How to pay yourself from your business
How do small business owners pay themselves? Typically, you’ll either pay yourself a salary, an owner’s draw (distribution), or, in partnerships, guaranteed payments.
An owner’s draw or distribution is a portion of the business’s profits that your company distributes to you as your payment. Draws/distributions are not wages and are not subject to payroll taxes. You’ll still owe income tax and, for many pass-through owners, self-employment tax on your share of the business’s taxable profit.
A salary is a fixed amount that you pay yourself each pay frequency (similar to how you pay employees a salary). Salaries are processed through payroll, subject to income tax withholding and FICA (Social Security and Medicare).
Different factors determine whether you pay yourself an owner’s draw or salary, and how much you receive.
At-a-glance: choose your pay method
- Sole proprietor or single-member LLC (default taxation): Owner’s draw only (no W-2 salary).
- Partnership or multi-member LLC (default taxation): Owner’s draws based on ownership; consider guaranteed payments if owners need pay regardless of profit.
- LLC taxed as S corporation: Reasonable W-2 salary plus distributions of remaining profit.
- Corporation (C corp) or LLC taxed as C Corp: W-2 salary if you work in the business; dividends may be paid from after-tax profits.
How to pay yourself from your business:
- Take an owner’s draw or salary, depending on your business structure
Sole proprietors, partners, and LLCs treated like sole proprietors/partners take an owner’s draw. Corporations, S Corps, and LLCs treated like corporations take a salary, and dividends (if applicable).
- Analyze your profits
Many small business owners limit wages to 50% of business profits. Your company should be profitable before taking a big paycheck.
- Look at expenses
If you have less coming in than going out, you might need to take a temporary pay cut. Add up all expenses to help you determine your pay.
- Take into account reasonable compensation
Consider your value to your business and research how much people are paid to do similar tasks to those you perform.
- Document your pay approach and cadence
Create or update your operating agreement (or corporate minutes) to define how and when owners are paid, and how amounts are calculated (e.g., profit percentages, guaranteed payments, salary bands).
Learning how to pay yourself as a business owner will require you to consider every factor.
How to pay yourself #1: Business structure
The best way to pay yourself as a business owner will depend on your type of business structure.
| Business Structure | Owner’s Draw or Salary? |
|---|---|
| Sole proprietor | Owner’s draw |
| Partnership | Owner’s draw |
| LLC | Owner’s draw (if treated like sole proprietors/partners) Salary (if treated like corporations) |
| C Corp | Salary (and dividends) |
| S Corp | Salary (and dividends) |
In partnerships and multi-member LLCs taxed as partnerships, you can also use guaranteed payments to compensate owners for services or capital, even when there’s no profit.
How to pay yourself as a sole proprietor
As a sole proprietor, you are the only owner of your business. Sole proprietorships are only taxed at the personal level. You and your business are considered the same legal entity, meaning you are liable for your business’s liabilities. So, how do sole proprietors pay themselves?
In a sole proprietorship, your compensation comes from a draw payment. You can take out as much as you want from your business’s profits since you are entitled to all your business’s money. You cannot pay yourself a W-2 salary as a sole proprietor, and draws are not a deductible business expense.
According to the Self-Employment Contributions Act (SECA), you must pay self-employment tax and estimated taxes on your income. Attach Schedule C to Form 1040, U.S. Individual Income Tax Return.
How to pay yourself from a partnership
A partnership is a business owned by two or more people. Partners are the same legal entity as their business, much like the tax entity of sole proprietors. Partnerships are pass-through tax entities, meaning the owners are responsible for paying their share of taxes.
How do partners get paid? If you are part of a partnership, you will take an owner distribution. Partners are considered self-employed, so you must pay SECA tax. Partnerships can also pay partners “guaranteed payments” for services or capital, which are deductible to the partnership, taxable to the partner, and generally subject to self-employment tax. Partners are not on payroll and do not receive W-2s.
To file taxes, attach Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., to Form 1040.
How to pay yourself from an LLC
A limited liability company (LLC) combines aspects of partnerships with corporations. Owners have shared tax responsibilities, but owners are not the same legal entity as their business. You must know how to pay yourself from an LLC:
Single-member LLCs are disregarded entities and treated as sole proprietorships. If you are a single-member LLC, you will receive LLC distributions from your business’s profits. You must attach Schedule C to Form 1040. You cannot put yourself on payroll in a single-member LLC taxed as a sole proprietorship.
Multi-member LLCs are treated as partnerships. Each owner pays their portion of taxes. You and the other members of the LLC receive draws from your business’s profits. You must attach Schedule K-1 to Form 1040. Multi-member LLCs can also use guaranteed payments to compensate members for services or capital regardless of profit.
Multi-member LLCs can elect to be treated as a corporation or S Corp. In this case, you would receive a salary. If you elect S corporation status, owner-employees must take a reasonable W-2 salary before any distributions. If you elect C corporation status, see the C corporation section below.
How to pay yourself from a C corporation
In a corporation, the business is legally separate from the owners. Because of this separation, you have limited liability for the company.
If your business is set up like a corporation and you are actively working for the business, you will receive a salary just like an employee. If you own stock in the corporation, you can also receive dividends. Salaries are deductible to the corporation and subject to payroll taxes. Dividends are paid from after-tax profits, are not deductible to the corporation, are not subject to FICA, and are taxable to shareholders.
Corporations are double-taxed, meaning the business is taxed and the business’s profits are taxed through each owner’s income. You will be taxed as an employee and pay FICA tax.
How to pay yourself from an S Corp
An S Corp separates the company from the owners, like in a C corporation. You are not double-taxed if you are an S Corp, but you still have limited liability for the company.
An S Corp owner can receive both wages and a distribution.If you work in the company, you will receive a salary. The salary will be taxed like normal employee compensation. You will have FICA tax taken out.
The IRS requires “reasonable compensation” for services you perform. After paying a reasonable W-2 salary, remaining profits can be distributed and are generally not subject to self-employment tax. Underpaying salary to avoid payroll taxes can trigger IRS scrutiny.
How to pay yourself as a business owner #2: Profits
Before you start taking a hefty paycheck, make sure your business is profitable. If your business is barely getting by, lower your personal income.
When you have a healthy small business cash flow, you can increase your pay. You might want to base your income on your business’s income.
Small business owners typically limit their wages to 50% of their business’s profits. You want to make sure that your business will retain enough of its profits to continue growing and operating efficiently.
A common approach is to maintain a cash reserve (e.g., 3–6 months of operating expenses) before increasing owner pay. Review profits monthly and adjust quarterly to match seasonality.
How to pay yourself #3: Expenses
As a business owner, you have all sorts of expenses. You need to pay taxes and overhead expenses like insurance and inventory.
When you’re considering how to pay yourself from your business, take a look at your profits and expenses. If you have less coming in than going out, you might need to take a temporary pay cut.
If you have employees, you need to pay wages, training costs, and benefits. As an employer, you are responsible for making sure your employees get paid via payroll before you pay yourself. Make sure all your expenses are accounted for when determining your pay.
Consider setting a fixed cadence (e.g., biweekly salary or monthly/quarterly draws) and a variable bonus tied to profit thresholds. This helps protect cash flow while still compensating you as the business grows.
How to pay yourself #4: Reasonable compensation
How much do other business owners get paid? Reasonable compensation is the amount of payment someone would be paid for similar work under similar circumstances at a different business.
When asking how to pay yourself from your business, take into account reasonable compensation. Consider your value to your business. Research how much people are paid to do similar tasks to those you perform.
Make sure you compare yourself to people who manage businesses with similar:
- Sizes
- Locations
- Industries
If the IRS thinks you are excessively paying yourself from your company, they may investigate your business’s spending. Base your paycheck on your comparison research.
To benchmark, use sources like BLS data, industry salary surveys, job boards for similar roles, and your CPA’s guidance. This is especially important for S Corp owner-employees who must set a reasonable W-2 salary.
How to record and pay yourself
- Owner’s draw (sole prop/single-member LLC): Write a business check or transfer funds from the business to your personal account.
- Record as Owner’s Draw/Member Distribution in equity; it’s not an expense.
- Partnership/multi-member LLC: Record draws by member. Guaranteed payments should be documented in the operating agreement and recorded as an expense by the entity; partners receive a Schedule K-1.
- S corp/C corp salary: Run payroll and issue a W-2. Withhold and remit payroll taxes. Distributions (S corp) or dividends (C corp) are separate from wages and must be documented.
- Taxes: Pass-through owners generally pay quarterly estimated taxes on their share of profit. Payroll withholding covers taxes for W-2 salaries.
- Documentation: Keep your operating agreement or corporate minutes updated with pay method, frequency, and formulas. Avoid mixing personal and business funds and keep clean book entries.
Draw vs. salary: quick comparison
- Compliance
- Draws/distributions: Not payroll; simpler, but you still owe tax on profit.
- Salary: Payroll compliance required; meets S Corp/C Corp requirements for owner-employees.
- Taxes
- Draws/distributions: Not subject to payroll taxes; profit may be subject to self-employment tax (sole proprietors/partners).
- Salary: Subject to payroll taxes; deductible wage expense for the company.
- Cash flow flexibility
- Draws: Flexible timing/amounts; easier to adjust in lean months.
- Salary: Predictable; requires steady cash flow.
- Best for
- Draws: Sole props, default-taxed LLCs, early-stage businesses with variable profit.
- Salary: S corp/C corp owner-employees, established businesses with stable cash flow.]
Essential tools to pay yourself compliantly
Here’s how Patriot’s payroll, accounting, time and attendance, and HR software can help you pay yourself:
- Ppayroll software: Run compliant payroll for owner-employees (S Corp/C Corp), automate withholding, and support multiple pay frequencies.
- Accounting software: Record owner’s draws/distributions, guaranteed payments, and dividends correctly in your books.
- Time and attendance software: Track hours if paying yourself hourly as an owner-employee.
- HR software: Store compensation policies, agreements, and documentation for audits.
FAQs
Only if the LLC elects to be taxed as an S corp or C corp and you work in the business. Default-taxed single-member and multi-member LLC owners typically take draws (and partners/members may receive guaranteed payments).
The draw itself isn’t taxed as wages and isn’t a deductible expense. You pay income tax and, for many pass-through owners, self- employment tax on your share of the business’s taxable profit, regardless of how much you draw.
Guaranteed payments are amounts a partnership (or LLC taxed as a partnership) pays owners for services or the use of capital, regardless of profit. They’re deductible to the entity and taxable to the recipient, generally subject to self-employment tax.
First set a “reasonable” W-2 salary based on your role, industry, and market pay. After that, distribute remaining profits as S Corp distributions if cash flow permits.
There’s no required frequency. Many owners take monthly or quarterly draws after reviewing profit and cash reserves. Set a cadence in your operating agreement to avoid unscheduled withdrawals.
No. Draws don’t reduce profit or taxable income. Only deductible business expenses or payroll wages (for corporations) reduce taxable income at the entity level.
Sole proprietors and single-member LLCs report on Schedule C. Partners and members in multi-member LLCs receive Schedule K-1. S Corp and C Corp owner-employees receive a W-2; S Corp shareholders also receive a K-1 for their share of profit.
If you’re consistently profitable and can justify a reasonable salary while leaving additional profit for distributions, an S Corp may reduce self-employment taxes. Consult your tax professional to evaluate thresholds and state rules.
Have employee expenses on your plate? With Patriot’s online payroll software, you can run payroll in three easy steps. Our software supports all common pay frequencies (e.g., biweekly) as well as less common schedules (e.g., quarterly). Try it for free today!
This article has been updated from its original publication date of November 4, 2014.
This is not intended as legal advice; for more information, please click here.
