How to Pay Yourself as a Business Owner: Salary vs. Distributions
Running a business is hard work — and you deserve to be paid. But figuring out how to pay yourself isn’t always as straightforward as writing a check to yourself from the business account. The right approach depends on your entity type, your tax situation, and how you’ve structured your business.
Here’s a breakdown of the most common ways business owners pay themselves — and how to do it right.
Sole Proprietors & Single-Member LLCs: You’re Taking an Owner’s Draw
If you're operating as a sole proprietor or a single-member LLC, you're not technically on payroll. Instead, you take an owner’s draw — meaning you transfer money from the business account to your personal account.
There’s no withholding, no W-2, and no separate tax — it’s just considered a reduction of equity. But don’t forget:
📌 You still owe self-employment taxes on your net business income.
📌 You’ll need to plan for quarterly estimated tax payments to avoid surprises.
Partnerships: Guaranteed Payments & Profit Shares
In a partnership or multi-member LLC taxed as a partnership, things get a bit more formal. You typically receive:
Guaranteed payments for your active involvement (like a salary substitute)
Profit distributions based on your ownership percentage
These are reported on your K-1 — not a W-2 — and you’re still responsible for self-employment taxes.
S Corporations: You Need a Reasonable Salary
If your business is taxed as an S corporation, you must pay yourself a reasonable salary through payroll if you’re actively involved. That means:
✅ Withholding payroll taxes
✅ Filing payroll tax returns
✅ Issuing yourself a W-2 at year-end
The good news? You can then take additional distributions (not subject to self-employment tax) — which can lead to real tax savings if done properly.
But the IRS watches this closely. Underpay yourself, and you risk an audit.
How Much Should You Pay Yourself?
There’s no one-size-fits-all number. A few things to consider:
Industry standards for similar roles
The profitability of your business
How much you need to cover personal expenses
Whether your compensation structure supports long-term growth
If you’re unsure, this is where a CPA (like us!) can help.
Don't Forget Estimated Taxes
Regardless of your structure, if taxes aren’t being withheld through payroll, you’re likely required to make estimated payments throughout the year. Missing them can lead to penalties — and unnecessary stress.
Need Help Structuring Owner Compensation?
At Dishion & Associates, we help small business owners structure their compensation, stay compliant with IRS rules, and make sure they’re getting paid smartly. Let’s set up a plan that works for your business — and your future.
👉 Schedule a consultation here.
