One of the most common questions small business owners ask is surprisingly personal: “How do I pay myself?” Unlike traditional employees who receive a set paycheck from their employer, small business owners face a much more complex reality. You wear multiple hats—owner, manager, marketer, accountant and your income depends on the financial performance of the business you’ve built. Paying yourself isn’t just about cutting a check. It’s about balancing your business’s needs with your personal financial goals, staying compliant with tax laws, and setting a sustainable financial model that helps your business and personal life thrive.
Many entrepreneurs either underpay themselves out of fear of draining business funds or overpay themselves without considering taxes, reinvestment needs, or future cash flow. Both extremes can hurt your business’s health. The key to success lies in understanding your business structure, financial position, and long-term goals—and choosing the right compensation strategy accordingly.
Why Paying Yourself Matters
Some small business owners think they should take as little as possible from the business, especially in the early years. Others assume they should take whatever cash is available. But neither approach is sustainable.
Paying yourself fairly matters because
You recognize your own hard work and time commitment.
Personal income lets you cover your household expenses, save for retirement, and achieve your financial goals.
Paying yourself forces your business to generate enough income to be sustainable.
You maintain financial boundaries between personal and business finances.
Your salary or draw can be tax-deductible for the business, depending on your structure.
When you neglect to pay yourself properly, you’re more likely to burn out, mismanage business funds, or face financial uncertainty in your personal life.
Understand Your Business Structure
The first and most important factor in how you pay yourself is your business entity type. Your legal structure determines the tax and legal rules around owner compensation.
Sole Proprietorship
If your business is a sole proprietorship, you and your business are legally the same entity. You don’t pay yourself a salary; instead, you take owner’s draws. You withdraw profits from the business bank account and transfer them to your account. These draws are not business expenses. Instead, you pay self-employment tax and income tax on the business’s net profit, regardless of how much you draw.
Single-Member LLC
A single-member LLC works similarly to a sole proprietorship for tax purposes (unless you elect to be taxed as an S Corp). You take owner’s draws, and you’re taxed on the net profit of the business. Like a sole proprietor, you cannot pay yourself a W-2 salary unless taxed as an S Corp.
Partnership
In a partnership, partners typically take distributive shares of profits and may take guaranteed payments. These are not salaries, but pre-tax distributions of the partnership’s profit. Partners report income on their personal tax returns and pay self-employment tax.
S Corporation
If your LLC or corporation has elected S Corp status, the rules change. As an S Corp owner-employee, you must pay yourself a “reasonable salary” as a W-2 employee. The business withholds payroll taxes, and you report this as wage income. Any additional profits can be taken as distributions, which are not subject to self-employment tax but are still subject to income tax.
C Corporation
Owners of a C Corp must pay themselves as W-2 employees. The business pays employment taxes on your wages. You can also take dividends from profits, though these are taxed separately as personal income.
Choose the Right Compensation Method
Once you know your structure, select the right way to pay yourself.
Owner’s Draw
Used by sole proprietors, single-member LLCs, and partnerships.
You transfer money from the business account to your personal account.
You don’t record the draw as a business expense.
You pay taxes on the net profit, not the draw amount.
Salary (W-2 Wages)
Used by S Corp owners (as employees) and C Corp owners.
Your business pays you through payroll, withholding income tax, Social Security, and Medicare taxes.
Payroll expenses, including your salary, are deducted as business expenses.
Profit Distributions or Dividends
For partnerships, S Corps, and C Corps.
After paying yourself a salary (if required), you can distribute additional profits.
Distributions are taxed differently from wages. In S Corps, they avoid self-employment tax; in C Corps, dividends may be taxed twice (corporate and personal levels).
Guaranteed Payments
Partners in a partnership may receive guaranteed payments for services or capital contributions. These are similar to wages but taxed differently.
Calculate How Much to Pay Yourself
How much should you pay yourself? There’s no one-size-fits-all answer. Your pay should reflect:
Your business’s profitability
Industry norms for your role
Your personal financial needs
Cash flow stability
Tax efficiency
Determine Profitability First
Before setting your salary or draw, review your profit and loss statement. Make sure your business can comfortably cover:
Operating expenses
Taxes
Debt payments
Savings for future growth
What’s left over is your available profit for compensation.
Consider Reasonable Salary Requirements (for S Corps and C Corps)
If you’re paying yourself a salary, the IRS requires it to be “reasonable compensation.”
Consider:
What would you pay someone else to do your job?
What’s the industry standard for your work?
How many hours per week are you working?
Underpaying yourself to avoid payroll taxes can trigger an IRS audit.
Create a Personal Budget
Your pay should meet your personal financial goals—housing, food, healthcare, retirement, and savings. Create a household budget to determine your minimum income needs.
Adjust for Seasonality
Some businesses have fluctuating income throughout the year. Consider setting a base salary/draw and taking bonus draws during profitable months.
Set Up the Mechanics of Paying Yourself
With the right amount and method decided, set up systems that keep your payments consistent and compliant.
If Taking Owner’s Draws
Open a separate business bank account.
Transfer your draw from the business account to your personal account on a regular schedule (weekly, bi-weekly, or monthly).
Record the transaction as an “owner’s draw” in your accounting software.
Set aside money for quarterly estimated taxes since no withholding is done on draws.
If Paying a Salary
Register for payroll taxes with the IRS and your state.
Use a payroll provider like Gusto, ADP, QuickBooks Payroll, or Paychex.
Run payroll on a set schedule.
Withhold appropriate taxes from each paycheck.
Pay the employer portion of Social Security, Medicare, and unemployment taxes.
If Taking Distributions
Transfer funds as separate payments from your salary.
Document them as distributions in your accounting system.
Keep enough retained earnings in the business to cover expenses.
Plan for Taxes
Paying yourself isn’t just about transferring money—it also impacts your taxes. Here’s how different payments affect your tax liability.
Self-Employment Tax
Sole proprietors, single-member LLC owners, and partners pay self-employment tax (currently 15.3%) on their net business profit, covering Social Security and Medicare.
Payroll Taxes
S Corp and C Corp owners on payroll split Social Security and Medicare taxes between the employee and employer. The employer portion is a business expense.
Estimated Quarterly Taxes
If you’re taking draws, set aside a portion of each payment (typically 25–35%) for federal and state taxes. Pay quarterly to avoid IRS penalties.
Keep Tax Records Organized
Maintain detailed records of every salary payment, owner’s draw, and distribution. Work with a CPA to file accurately.
Reevaluate Your Pay Regularly
Your compensation isn’t set in stone. Review it regularly as your business evolves.
Increase your pay when profits grow and stabilize.
Temporarily reduce draws if cash flow tightens.
Reassess tax strategies annually.
Meeting with your accountant or financial advisor every quarter can help optimize your pay based on current business performance and tax law changes.
Common Mistakes to Avoid
Many small business owners make mistakes when paying themselves. Here are the top pitfalls to avoid:
Mixing business and personal funds: Always pay yourself through a documented draw or payroll process.
Ignoring tax obligations: Don’t forget to pay estimated or payroll taxes on your income.
Overpaying during growth stages: Leave enough money in the business to reinvest in growth and cover future expenses.
Underpaying yourself indefinitely: Long-term, you need a sustainable personal income to stay motivated and financially healthy.
Failing to follow IRS rules for S Corps: Taking distributions instead of a required salary invites audits and penalties.
Pay Yourself Like a Professional
As a small business owner, your compensation reflects your leadership and your commitment to your business’s success. Paying yourself isn’t selfish it’s responsible. A healthy business can support both your personal goals and its future growth.
Start by understanding your business entity, select the appropriate payment method, and calculate a fair amount based on your business finances and personal needs. Set up the right systems for regular payments, keep taxes in mind, and review your pay regularly as your business grows.
Entrepreneurship comes with risks, but paying yourself consistently helps create financial stability at home and in your business. When your personal finances are in order, you can focus on what matters most—serving your customers, growing your brand, and building a business that lasts.
FAQs
Can I just transfer money from my business account to my personal account?
Yes, if you are a sole proprietor or single-member LLC. This is called an owner’s draw. But keep records and pay taxes on your business profit.
How do S Corp owners pay themselves?
S Corp owners must pay themselves a reasonable salary via payroll and can take additional profit as distributions.
How often should I pay myself?
Many business owners pay themselves bi-weekly or monthly to create personal budgeting consistency.
Can I deduct my salary as a business expense?
Salaries paid through payroll are business expenses. Owner’s draws are not.