How Do I Pay Myself as a Business Owner? Owner's Draw vs. Salary

How you pay yourself depends on how your business is structured for tax purposes. Here's how it works for each type.

Sole proprietors and single-member LLCs: owner's draw

You don't pay yourself a salary. Instead, you transfer money from the business account to your personal account. This is recorded as an owner's draw.

• An owner's draw is not a business expense, so it doesn't reduce your profit
• You pay tax on the business's profit, whether you draw it out or leave it in the account
• No payroll or withholding is required, but you need to make quarterly estimated tax payments

Multi-member LLCs and partnerships: draws and guaranteed payments

Partners typically take distributions according to the operating agreement. Partners can also receive guaranteed payments for services, which are treated like a deductible expense for the partnership but are taxable income (and subject to self-employment tax) for the partner. Partners aren't W-2 employees of their own partnership.

S corporations: salary plus distributions

If your business has elected S-corp status and you work in it:

1. You must pay yourself a reasonable salary through payroll, with taxes withheld
2. You can take additional profit as distributions, which aren't subject to payroll taxes

Distributions should generally be proportional to ownership if there's more than one owner.

C corporations: salary and dividends

Owners who work in the business are paid a salary through payroll. Profits can be paid out as dividends, which are taxed at the shareholder level.

How much should you take?

Ask yourself:

1. Have I set aside money for taxes? Move your tax percentage to a savings account first.
2. Does the business have a cash cushion? Aim to keep at least one to two months of operating expenses in the account.
3. Are there upcoming large expenses? Equipment, insurance renewals, slow seasons.

What's left after these is what you can comfortably pay yourself. Many owners use a consistent, scheduled transfer (for example, the 1st and 15th) rather than pulling money whenever they need it.

Common mistakes

• Paying personal bills directly from the business account. Transfer to your personal account first, then pay personal bills.
• Recording draws as expenses. This understates your profit and can cause tax problems.
• Taking out so much that taxes can't be paid.
• S-corp owners taking distributions with no payroll. This is an IRS red flag.

The bottom line

Your entity type determines the method; your cash flow determines the amount. Pay yourself on a schedule, save for taxes first and record it correctly in your books.

---

Need help getting this right? TRIG Bookkeeping & Tax Services helps new business owners in Washington with company registration, monthly and annual bookkeeping, and government compliance. Contact us to talk about your business.

This article is general information, not legal or tax advice for your situation. Tax rules and fees change, so confirm current details with the IRS, the Washington Department of Revenue, or a qualified professional.