How Do I Pay Myself as a Business Owner?

In this article

1. How you pay yourself depends on your business structure
2. Sole proprietors and single-member LLCs: the owner's draw
3. Partnerships and multi-member LLCs
4. S corporations: salary plus distributions
5. How much should you pay yourself?
6. Example
7. Setting up a simple pay system
8. Example: when an S corp might save money
9. Common mistakes
10. FAQ

Paying yourself is one of the most confusing parts of running your own business. Can you just transfer money to your personal account? Do you need payroll? How much should you take? The answer depends mainly on your business structure, then on your cash flow. This guide explains both.

How you pay yourself depends on your business structure

Sole proprietors and single-member LLCs: the owner's draw

You don't pay yourself a salary. Instead, you take an owner's draw: a transfer from your business account to your personal account. Draws aren't a business expense and aren't taxed when you take them. Instead, you pay income tax and self-employment tax on the business's entire profit for the year, whether you take it out or leave it in the business.

That's why you must set aside money for taxes separately. See how to pay taxes when you're self-employed.

Partnerships and multi-member LLCs

Partners take draws against their share of profits, and may receive guaranteed payments for services, which work somewhat like a salary. Each partner reports their share of profit on their personal return from a Schedule K-1. Your operating agreement should spell out how and when partners get paid.

S corporations: salary plus distributions

If your business is an S corporation (including an LLC that elected S corp status), owners who work in the business must be paid a reasonable salary through payroll, with income tax withholding and payroll taxes. Any remaining profit can be taken as distributions, which aren't subject to self-employment or payroll tax.

That split is why S corps can save money for profitable businesses. But "reasonable" matters: the IRS expects your salary to reflect what similar businesses would pay for similar work. Paying yourself too little to avoid payroll taxes is a common audit issue. S corps also add costs: payroll, a separate business tax return and often higher accounting fees. Talk to an accountant before electing.

How much should you pay yourself?

Start with what the business can afford, not what you wish you could take.

1. Calculate your average monthly profit over the last 3 to 6 months (revenue minus expenses).
2. Set aside taxes: 25 to 30% of profit for most self-employed people.
3. Keep a cash reserve in the business: many owners aim for at least 2 to 3 months of operating expenses.
4. Reinvest what the business needs to grow.
5. Pay yourself what's left, as a consistent amount on a set schedule, such as twice a month.

Example

A freelance designer averages $9,000 a month in revenue and $2,000 in expenses: $7,000 profit. She sets aside 28% ($1,960) for taxes, keeps $540 a month in the business to build a cash reserve, and pays herself a steady $4,500 a month as an owner's draw. In strong months the extra builds her reserve; in slow months the reserve keeps her pay steady.

Setting up a simple pay system

1. Open separate accounts: business operating account, tax savings account, and your personal account.
2. Choose a pay schedule: for example, the 1st and 15th of each month.
3. On each pay date: move your tax set-aside to the tax account, transfer your owner's pay, and leave the rest for operating expenses and reserves.
4. Review quarterly: if profit has grown steadily, raise your pay; if it's fallen, lower it before cash gets tight.

Example: when an S corp might save money

Sam's consulting LLC earns $120,000 in profit. As a default single-member LLC, self-employment tax applies to the full profit: about $16,955 ($120,000 × 92.35% × 15.3%).

If the LLC elects S corp status and pays Sam a reasonable salary of $70,000, payroll taxes (employer and employee shares combined) on the salary are about $10,710. The remaining $50,000 can be taken as distributions without payroll tax.

The rough difference, about $6,000 a year, has to be weighed against extra costs: payroll service, a separate corporate tax return, state fees and accounting. The salary also must genuinely be reasonable for Sam's work. This simplified example ignores other effects, such as on the QBI deduction and retirement contributions, so get an accountant to run your real numbers.

Common mistakes

• Mixing accounts: paying personal bills from the business account makes bookkeeping messy and can weaken an LLC's liability protection.
• Paying yourself irregularly whenever cash is in the account, then running short on bills or taxes.
• Forgetting taxes on profit you left in the business.
• Electing S corp too early, before profits are high enough for the savings to outweigh the extra costs.
• Not paying yourself at all for too long. A business that can't pay its owner isn't sustainable yet; revisit pricing with the rate calculator.

Frequently asked questions

Can I pay myself a salary from my LLC?

A single-member LLC taxed by default can't pay its owner a W-2 salary; you take owner's draws instead. If the LLC elects S corporation tax status, you can and must pay yourself a reasonable salary through payroll.

Are owner's draws taxed?

Not when you take them. Sole proprietors and default LLC owners pay income and self-employment tax on the business's total profit, whether or not they draw it out.

How much should I pay myself as a small business owner?

Base it on consistent profit: set aside taxes and a cash reserve first, then pay yourself a steady amount you can sustain, adjusting quarterly as profit changes.

When should I become an S corp?

Often when profits are high enough that self-employment tax savings outweigh the added costs of payroll and accounting. An accountant can run the numbers for your situation.

This article is general information for US readers, not legal, tax or financial advice. Rules, prices and platform policies change, so confirm details with official sources or a qualified professional.