Quick answer: How you pay yourself depends on how your business is taxed. Sole proprietors and partners take owner’s draws, S corporation owners take a reasonable salary through payroll plus distributions, and C corporation owners take a salary and sometimes dividends.
One of the most common questions we get from new owners is simple: how do I actually pay myself? The answer depends on how your business is set up for tax purposes, not just on its legal name.
Sole proprietors and single member LLCs
You take an owner’s draw. You simply transfer money from the business account to your personal account. A draw is not a business expense and is not run through payroll.
You pay income tax and self employment tax on the business profit, whether you draw it out or not. That is why quarterly estimated taxes matter so much.
Partnerships and multi member LLCs
- Owners can take draws against their share of profit
- Owners who work in the business may also receive guaranteed payments, which work like a salary but are not run through payroll
- Each owner’s share of profit is reported on a K-1 and taxed on their personal return
S corporations
S corp owners who work in the business must pay themselves a reasonable salary through payroll, with taxes withheld. Profit above that salary can be taken as distributions, which are not subject to Social Security and Medicare tax.
Watch out: Taking only distributions and no salary is one of the most common S corp mistakes, and the IRS does look for it. See our S corp election service for help setting the right salary.
C corporations
Owners who work in the business are paid a salary through payroll, which the company deducts. Profit paid out as dividends is not deductible and is taxed again on your personal return.
Good habits for any business
- Keep business and personal accounts completely separate
- Pay yourself on a regular schedule rather than whenever cash looks high
- Set aside money for taxes each time you pay yourself
- Record draws and distributions as equity in your books, never as expenses
Paying yourself FAQs
Can a single member LLC owner pay themselves a W-2 salary?
Not unless the LLC elects to be taxed as an S corporation or C corporation. A regular single member LLC is taxed like a sole proprietorship, so the owner takes draws instead.
Are owner’s draws taxed?
The draw itself is not taxed. You pay income tax and self employment tax on the business profit, whether or not you take it out.
How much should I set aside for taxes when I pay myself?
It depends on your income and deductions. Many owners set aside about 25 to 30% of profit as a starting point, then adjust with a tax projection.
What counts as a reasonable salary for an S corp owner?
It is roughly what the business would pay someone else to do the same work. The IRS looks at your duties, time spent, experience and what similar businesses pay; there is no fixed percentage.
Can S corp distributions be paid unevenly to owners?
No. S corporation distributions must follow each owner’s ownership percentage. Uneven distributions can put the S corporation election at risk.
Get your owner pay right
We set up owner pay the right way in your books and payroll, and plan the taxes around it. Learn more about our bookkeeping and payroll services.
This article is general information and not tax advice for your situation. Tax rules change, so talk with a qualified professional before making decisions.
