As a small business owner focused on growing your client base, delivering excellent customer service, and keeping the lights on, you may be putting all your earnings back into the business. You aren’t alone. But treating yourself like an employee—and compensating yourself accordingly—draws a clear line between your personal and business finances. This is key for managing cash flow, tracking expenses, and staying on the right side of the IRS.
Whether you are a sole proprietor or own a limited liability company (LLC) or an S corp, building a habit of paying yourself sets the tone for sustainable business practices. Read on to learn more about how to pay yourself as a business owner.
How to pay yourself as a business owner
Here’s a breakdown of the most common approaches to paying yourself, their pros and cons, and how they work within different business structures:
Owner’s draw
An owner’s draw is a common method for sole proprietorships, partnerships, and pass-through LLCs. This involves paying yourself via check or direct transfer (such as ACH payment or wire) from your business’s bank accounts.
You don’t pay any taxes at the time of withdrawing the funds. However, you will be responsible for making estimated tax payments on all profits passing through to you. Owner’s draws are subject to income tax and self-employment taxes.
Owner’s draws entail less administrative overhead compared to payroll, because you don’t need a payroll provider to facilitate them. There’s also no specific schedule for owner’s draws, meaning you can take them as your cash flow permits or as you need to. If your business is structured as a partnership or LLC, owner’s draws may be subject to the terms specified in the partnership agreement or operating agreement.
It’s important to carefully record all draws to ensure accurate financial records.
Salary
Paying yourself a regular salary is akin to being a traditional employee of your own company. This method is required for businesses formed or taxed as S corporations or C corporations, as long as the owner is involved in the operations of the company and also receives distributions. The IRS requires owner salaries to be “reasonable”—meaning they’re comparable to the standard in your industry for the amount and type of services you perform.
Salaries are subject to payroll taxes:
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Social Security and Medicare taxes (also known as FICA)
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Federal unemployment (FUTA)
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State unemployment (SUTA)
For FICA, both the employee and employer contribute, each paying 6.2% for Social Security (up to an annual wage limit) and 1.45% for Medicare (on all wages). FUTA and SUTA taxes, however, are typically paid only by the employer.
For S corps, the wages represent an expense to the business and income to the owner. When you record wages, the amounts offset each other, so there is no effect on total taxable income from the S corp. However, the wages will increase the total taxes paid because they are subject to payroll tax. C corps receive a similar treatment, with the salary a deduction to the corporation and income to the owners.
The easiest way to take a salary from your company is by:
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Establishing a payroll system (either in-house or through a third-party payroll provider)
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Issuing regular paychecks (physical or direct deposit)
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Withholding and remitting the appropriate state, local, and federal taxes
Your payroll system will need to withhold taxes and file payroll reports like Form 941 (Employer’s Quarterly Federal Tax Return).
Paying yourself with a salary also establishes a clear payroll process, which can be especially helpful if you need to obtain a loan or secure investors.
Create pay stubs quickly
Use Shopify’s pay stub generator to instantly create accurate paychecks. Include essential details like year-to-date income and deductions.
Create paycheckDistributions and dividends
Shareholder distributions are very similar to owner’s draws, but they’re used by S corps and LLCs, which are taxed differently than sole proprietorships or partnerships. Distributions reduce the owner’s equity in the business.
Dividends are used by owners or shareholders of a C corporation. The corporation earns profits and pays corporate income tax on those profits first. After the corporation pays its taxes, any remaining after-tax profits can be distributed to shareholders as dividends. C corps can decide to distribute dividends or to reinvest profits into the business to drive growth.
Determining how much to pay yourself as a business owner
Deciding how much to pay yourself is important, as you must balance your personal financial needs with your business’s current and future health. There’s no one-size-fits-all answer.
Here are several factors to consider to help you determine your compensation strategy:
Figure out how much you need
When determining how much to pay yourself as a business owner, it can help to start with a ballpark estimate of how much you need to earn to support yourself. You can then work backward from there. Figure out the total amount of your personal expenses, including housing, food, transportation, insurance, and car payments. Having a firm grasp of your personal expenses will help you determine your desired compensation.
Project your cash flow
Your compensation should not jeopardize the business’s ability to cover operating expenses. Build a cash flow projection to determine how much cash you expect to flow in and out of the business each month, based on your sales forecasts and expenses. Once you understand how much money the business should have available each month, build your compensation into the model.
Build a cash reserve
Ideally, even after you pay yourself, your business should have profits that go toward a cash reserve. Why? Your business should have a reserve to draw on in case of unexpected events like natural disasters, contract cancellation, or significant price increases in your supply chain. For small retail or ecommerce businesses, it’s important because cash flow can be unstable due to sales fluctuations, seasonality, and unexpected events. Aim for three to six months of operating expenses in a cash reserve.
Plan for growth
Think about the future of your business. Do you plan to hire more employees, purchase new equipment, or expand into different markets? These plans require capital, so you’ll have to decide how much profit to reinvest for growth versus distribute as your pay.
You can set clear profit margins for your business first, then model your compensation as a planned allocation after budgeting for future growth. By treating your pay as a planned outflow within your cash flow model, it aligns with long-term profitability and growth, rather than hindering it.
Special considerations for owners of S corporations
Some business structures and tax statuses require the owner to be paid with W-2 wages, specifically S corps.
Tax considerations
For owners of S corporations or LLCs electing to be taxed as S corporations, your method of compensation affects your tax obligations. This is because the IRS requires S corp owner-employees to pay themselves a reasonable salary for the work they perform. This salary is subject to Social Security and Medicare taxes, which are split between the employee and the business. However, any additional profits you take out as distributions are generally not subject to these payroll taxes.
A tax professional can help you understand the tax implications of your compensation.
Reasonable compensation
For owners of S corporations or LLCs electing to be taxed as S corporations, your salary amount must be considered “reasonable” by the IRS, meaning it can’t be too low. This rule exists because distributions from an S corp generally receive more favorable tax treatment than wages. It aims to prevent owners from paying themselves a minimal salary and taking most profits as tax-advantaged distributions.
According to the IRS, your salary must be equivalent to what a non-owner would be paid if they performed similar services. If the salary is deemed unreasonably low, the IRS may decide distributions should be reclassified as wages. It’s a good idea to research compensation for comparable roles before you pay yourself.
Consult the Internal Revenue Service to learn more about its guidelines for “reasonable compensation” and consult with a tax professional if you’re unsure.
How to pay yourself as a business owner FAQ
How do business owners pay themselves?
For pass-through entities (sole proprietorships, partnerships, some LLCs), simply move funds from your business account to personal bank accounts via an owner’s draw. For S corporations and C corporations, pay yourself a salary via a formal payroll system and shareholder distributions or dividends.
Can you write off your own salary as a business owner?
Yes, if your business is an S corporation or a C corporation, your salary is generally a deductible business expense. However, for a sole proprietorship, partnership, or limited liability company taxed as a pass-through entity, an owner’s draw is not a deductible business expense, as the owner and business are often treated as the same entity for income tax purposes.
What is an owner’s draw?
An owner’s draw is when a business owner withdraws money from their business to compensate themselves. It’s common for sole proprietors, partnerships, and LLCs taxed as such. Unlike a salary, it’s not a business expense or subject to payroll taxes. The owner is still responsible for self-employment taxes on the business’s total net profits.
