How to Pay Yourself from Your Business: A Quick Guide for Business Owners

As a business owner, one of the most important (and often confusing) questions is: How do I properly pay myself? The answer depends entirely on your business structure. Paying yourself incorrectly can lead to tax headaches, IRS scrutiny, or even penalties. To keep things smooth and compliant, let’s break down how different business structures handle owner compensation.

Sole Proprietors and Single-Member LLCs: Owner’s Draws, Not Payroll

If you operate as a sole proprietor or a single-member LLC, you are not considered an employee of your business. That means:

✅ No payroll – You cannot put yourself on a W-2.
✅ Owner’s draws – You take money from the business whenever needed.
✅ Taxes – You report net earnings on Schedule C of your personal tax return.
✅ Self-employment taxes – You pay 15.3% on net income (this covers Social Security and Medicare).

💡 Pro Tip: Since you don’t withhold taxes from your draws, it’s wise to set aside a portion of your income for quarterly estimated tax payments.

Partnerships and Multi-Member LLCs: No W-2s, Just Profit Distributions

If you’re in a partnership or a multi-member LLC, you and your partners are not employees. Here’s how you get paid:

✅ No W-2 wages – Partners cannot receive a paycheck like employees.
✅ Guaranteed payments – Payments for active services, taxed as ordinary income and subject to self-employment tax.
✅ Profit distributions – These generally are subject to self-employment tax (except for passive limited partners).

💡 Pro Tip: Your partnership agreement should clearly outline how profits and draws are distributed to avoid conflicts later.

S Corporations: Reasonable Salary + Tax-Efficient Distributions

Running an S Corporation comes with tax advantages, but you must follow the rules:

✅ You must pay yourself a "reasonable salary" as a W-2 employee.
✅ Your salary is subject to payroll taxes (FICA – 15.3%, split between you and the business).
✅ Any remaining profits can be distributed to you tax-free (since you already paid tax at the corporate level).

💡 Why This Matters: The IRS watches for business owners who skip a salary to avoid payroll taxes. If you’re audited and they find your salary “too low,” they can reclassify distributions as wages, hitting you with back taxes and penalties.

C Corporations: Salaries and Dividends

If you run a C Corporation, you have two main ways to pay yourself:

✅ W-2 salary – Subject to payroll taxes just like any employee.
✅ Dividends – Profits can be distributed as dividends, but they are double-taxed (once at the corporate level at 21%, and again at your personal tax rate).

💡 Best Strategy: Most C-Corp owners take a mix of salary and dividends to optimize their tax situation.

Final Thoughts: Get It Right to Avoid IRS Trouble

Choosing the right method to pay yourself isn’t just about getting money into your personal bank account—it’s about staying compliant and minimizing taxes. Here are a few quick takeaways:

✔️ Know your business structure – Each one has different rules for owner compensation.
✔️ Avoid IRS red flags – Paying yourself incorrectly (or skipping salary in an S-Corp) can trigger audits.
✔️ Plan for taxes – Whether it’s self-employment tax, payroll taxes, or dividend taxation, make sure you’re setting aside enough to cover your obligations.

Still unsure? A tax professional can help you navigate the best payment strategy for your specific situation. Understanding how to pay yourself properly is one of the smartest moves you can make as a business owner! 🚀