Paying yourself properly affects not only your personal finances but also your business’s legal and tax standing. The way you pay yourself depends largely on your business structure—whether you’re a sole proprietor, partnership, LLC, or corporation.
Getting this right helps you:
- Avoid tax issues or penalties
- Maintain accurate financial records
- Ensure steady personal income
- Plan for retirement and benefits
Table of Contents
- 1. Paying Yourself as a Sole Proprietor or Single-Member LLC
- 2. Paying Yourself in a Partnership or Multi-Member LLC
- 3. Paying Yourself as an S Corporation Owner
- 4. Paying Yourself as a C Corporation Owner
- Other Ways Business Owners Compensate Themselves
- Tax Implications and Tips for Paying Yourself
- How Much Should You Pay Yourself?
- Final Thoughts
1. Paying Yourself as a Sole Proprietor or Single-Member LLC
If your business is a sole proprietorship or a single-member LLC, the IRS considers you the same entity as your business for tax purposes. This means you don’t receive a salary like an employee.
How you pay yourself:
You take what’s called an “owner’s draw.” This is simply withdrawing money from your business profits to cover your personal expenses. There’s no formal paycheck, and these draws are not subject to payroll taxes.
Key points:
- Owner’s draws are not tax-deductible for the business because you’re taking after-tax profits.
- You pay income tax and self-employment tax on the net profits of the business, regardless of how much you withdraw.
- It’s important to keep track of these draws in your accounting to avoid confusion.
2. Paying Yourself in a Partnership or Multi-Member LLC
In a partnership or multi-member LLC, the owners are called “partners” or “members.” The business itself usually does not pay salaries to partners.
How you pay yourself:
Partners typically take distributions, similar to owner’s draws, based on the partnership agreement. Each partner’s share of profits (and losses) is reported on their personal tax returns.
Key points:
- Like sole proprietors, partners pay taxes on their share of the business income, whether or not they withdraw the money.
- The partnership itself files an informational return but generally doesn’t pay income tax.
- It’s crucial to have a clear partnership agreement to avoid conflicts over distributions.
3. Paying Yourself as an S Corporation Owner
An S Corporation (S Corp) is a popular choice for many small businesses because it offers potential tax savings, but it changes how you pay yourself.
How you pay yourself:
S Corp owners must pay themselves a “reasonable salary” as employees, which means regular wages subject to payroll taxes. Any additional profits can be taken as distributions, which are generally not subject to self-employment taxes.
Key points:
- The IRS requires the salary to be reasonable based on your role and industry standards to avoid underpayment of payroll taxes.
- You pay income tax and payroll taxes on your salary, but distributions are taxed only as income (no payroll taxes).
- This split can result in tax savings but requires careful bookkeeping and payroll processing.
4. Paying Yourself as a C Corporation Owner
A C Corporation (C Corp) is a separate legal entity, so the business pays taxes on its profits, and owners pay taxes on salaries and dividends separately.
How you pay yourself:
Owners who work in the business are employees and receive a salary with payroll taxes withheld. They may also receive dividends from profits after corporate taxes.
Key points:
- Salaries are deductible business expenses, lowering corporate taxable income.
- Dividends are paid from after-tax profits and taxed again at the personal level (double taxation).
- C Corps can offer benefits like stock options and retirement plans for owners and employees.
Other Ways Business Owners Compensate Themselves
Beyond regular draws or salaries, owners may also benefit from:
- Reimbursements: Repaying yourself for business expenses you paid personally (e.g., mileage, supplies).
- Bonuses: Particularly in corporations, owners can pay themselves bonuses, which are subject to payroll taxes.
- Loans: Some owners take out loans from the business, which must be properly documented and repaid.
Tax Implications and Tips for Paying Yourself
- Keep personal and business finances separate: Always use separate bank accounts to avoid confusion and protect your liability.
- Set aside money for taxes: As a business owner, you are responsible for estimating and paying quarterly taxes on your income.
- Maintain good records: Document all withdrawals, salaries, and reimbursements for tax and legal compliance.
- Consult a tax professional: Business taxes can be complex, especially when determining “reasonable salary” for S Corps or navigating partnership distributions.
How Much Should You Pay Yourself?
There’s no one-size-fits-all answer to how much to pay yourself. Consider these factors:
- Your business’s profitability and cash flow
- Industry standards and your role in the company
- Personal living expenses and financial goals
- Tax planning and retirement savings
Many advisors suggest starting with a conservative draw or salary that covers your essential expenses, then adjusting as your business grows.
Final Thoughts
Paying yourself as a business owner requires balancing personal financial needs with business health and tax compliance. Whether you’re taking draws, distributions, or a salary, the key is understanding your business structure and working closely with accountants or financial advisors to optimize your compensation strategy.
By setting up a clear and compliant system to pay yourself, you’ll ensure your business thrives while you maintain financial stability.
