How you pay yourself from your own business depends on your business structure — and getting it right matters for taxes and legal protection.
For a Sole Proprietorship or Single-Member LLC: - You pay yourself through an 'owner's draw' — simply transferring money from the business account to your personal account. - You don't take a formal salary or have taxes withheld from these draws. - The business's entire net profit is considered your income, and you pay income tax plus self-employment tax (15.3%) on it, regardless of how much you actually withdraw. - You pay these taxes through quarterly estimated tax payments. - Keep business and personal accounts separate, and document your draws.
For a Partnership or Multi-Member LLC: - Partners take owner's draws based on their ownership share. - Each partner pays income and self-employment tax on their share of the profits.
For an S-Corporation (or LLC taxed as an S-Corp): - You must pay yourself a 'reasonable salary' through payroll (with taxes withheld) for the work you do. - You can take ADDITIONAL profits as 'distributions,' which are NOT subject to self-employment tax — this is the main tax advantage of an S-Corp. - The salary is subject to payroll taxes; distributions are not. - The IRS requires the salary to be 'reasonable' for your role (setting it too low to avoid taxes is an audit risk).
For a C-Corporation: - You're typically paid a salary as an employee (with taxes withheld). - You can also receive dividends, though these are taxed at both the corporate and personal level (double taxation).
Key principles regardless of structure:
1. Separate your finances: Keep business and personal bank accounts separate. This is essential for liability protection (especially for LLCs and corporations) and clean bookkeeping.
2. Set aside taxes: For draws (sole props, partnerships, LLCs), no taxes are withheld, so set aside roughly 25–30% for taxes and pay quarterly.
3. Pay yourself consistently: Even with draws, paying yourself a regular, planned amount helps with budgeting (both personal and business).
4. Don't take everything: Leave enough in the business for expenses, taxes, and a cushion.
5. Track everything: Document all payments to yourself for tax and accounting purposes.
How much to pay yourself: - Depends on your business's profitability and cash needs. - A common approach: cover your essential personal expenses while leaving the business enough to operate and grow. - Many new owners pay themselves modestly at first as the business stabilizes.
The takeaway: Sole proprietors and single-member LLCs pay themselves via owner's draws (transferring money, with taxes handled through quarterly estimated payments on all profit). S-Corp owners must take a reasonable salary through payroll plus optional distributions. Always keep business and personal finances separate, set aside money for taxes, and consult an accountant — especially when choosing or changing your structure — to do it correctly and tax-efficiently.