How to Pay Yourself As A Business Owner

As soon as your business starts making money, you must decide how to pay yourself. Paying yourself isn’t complicated, but there are tax considerations to be aware of.

There are two main ways to pay yourself as a business owner: by taking a salary or by taking an owner’s draw — or a combination of the two.

Here’s a detailed description of both options and other factors you must consider.

Table of Contents
  1. Take an Owner’s Draw
  2. Pay Yourself a Salary
  3. Paying Yourself Based on Your Business Type
    1. Sole Proprietorship
    2. LLC
    3. Partnership
    4. Corporation
  4. Mistakes to Avoid When Paying Yourself As a Business Owner
    1. Mixing Business and Personal Funds
    2. Forgetting to Put Aside Money for Taxes
    3. Not Leaving Enough in the Business
  5. FAQs
  6. Final Thoughts

Take an Owner’s Draw

When your business has a profit, you can take that profit as income. You can simply write yourself a check from the business and deposit it into your personal account; this is called an owner’s draw.

If you pay yourself this way, all of your income will be considered salary and will be subject to self-employment taxes — which is the employer portion of Social Security and Medicare.

Owner’s Draw Pros Owner’s Draw Cons
Simple, no need for a payroll service Inconsistent income
Flexibility based on business profits You’ll need to budget for taxes

Pay Yourself a Salary

A salary is a fixed payment made by an employer to an employee. While most salaried employees are paid bi-weekly, salaries are often expressed as an annual amount.

As a business owner paying yourself via salary, you would give yourself a regularly scheduled paycheck in a predetermined dollar amount. When you pay yourself a salary, your paycheck would have taxes (including FICA or self-employment tax) taken out before you receive it.

It’s important to note that if you choose to pay yourself a salary, you are bound by the IRS’s “reasonable compensation” rule. It states that your salary must reasonably align with what you’d earn for the same job at a corporation or other business. 

This matters if you are taking distributions along with your salary. The government wants it’s the Social Security and Medicare taxes it’s due for that job. So don’t pay yourself too little.

Salary Pros Salary Cons
Consistent income makes it easier to create your personal budget You have to have a payroll service
Saves money on self employment taxes Must be an S-corp

Paying Yourself Based on Your Business Type

Deciding whether to pay yourself a salary or an owner’s draw may depend on the type of business you own, with personal decisions and IRS requirements at play. Here’s a closer look at some different scenarios related to drawing income from a business.

Sole Proprietorship

A sole proprietorship is an unincorporated business owned by one person. As a sole proprietor, you and your business are one entity. What the business earns, you earn.

As a sole proprietor, you’ll typically pay yourself a draw. But while you don’t have to share the profits with another business owner, you are fully responsible for covering any business expenses and liabilities. 

Because of this, you’ll want to ensure you set aside a percentage of your business’s profit for taxes.


An LLC (Limited Liability Company) is a legal structure designed to separate a business’s liability from its owners. Your business is now a separate entity for legal purposes, but it’s considered a pass-through entity for tax purposes. You can designate your business as an LLC whether you are a single owner or you have business partners.

So, as far as paying yourself is concerned, it works the same as being a sole proprietorship.

Regarding tax filing, single-member LLCs are taxed like sole proprietors, while multi-member LLCs are taxed as partnerships.


Partnerships work a bit differently when it comes to paying owners. You can’t take a salary when you’re a member of a business partnership. You’ll be taxed on your percentage of the business profits. Therefore, a draw or similar distribution of profits is required.

However, if you perform services outside of your capacity as a partner, you can be paid as an independent contractor for those services.


A corporation is a business legal structure that taxes the owners, or shareholders, separately from the entity. There are C-corps and S-corps. S-corps are for small businesses.

The IRS assigns S-corps a special status, giving them tax advantages over C-corps. As the owner of an S-corp, you will get paid via a salary as well as earning distributions on profits as a shareholder.

If there are other shareholders in your S-corp, they’ll also earn distributions.

Your salary is taxed as wages, on which you will pay income taxes and Social Security and Medicare. Any distributions you receive will only be subject to income taxes.

Mistakes to Avoid When Paying Yourself As a Business Owner

When planning to draw income from your business, it’s important to avoid errors that could hurt your business or your personal finances. Here are some mistakes to avoid.

Mixing Business and Personal Funds

No matter how small your business or side hustle is, you should open a business checking account to avoid mixing your business and personal finances.

If you don’t, it can be difficult to sort things out come tax time. A low-fee business banking account that offers built-in payroll and other financial tools can help.

Also, if you have an LLC, having separate finances is important to maintain that legal separation between you and your business.

Related: Best Banks for Small Businesses

Forgetting to Put Aside Money for Taxes

One of the most common mistakes new business owners make is forgetting to set aside enough money for taxes.

Even if you pay yourself via payroll, you probably have income where taxes were not withheld. You’ll want to ensure you have enough to pay what’s due at tax time. Common advice is to set aside 30% of your income for taxes. But if you aren’t sure, speak to your accountant, and they will be able to advise you.

To make it easy, some business checking accounts allow you to earmark money for taxes. For example, a Bluevine business checking account allows you to set up sub-accounts so you can set money aside for your business’s taxes and future expenses. 

Related: Estimated Taxes, Due Dates, and Safe Harbor Tax Rules

Not Leaving Enough in the Business

You’ll want to leave enough cash in the business to account for any cash flow needs your business may have.

It can be tempting to write yourself a check for every dollar of profit, but if you don’t leave a slush fund in your business, you may find yourself simply putting that money back in.

You want your business to have enough cash to take advantage of opportunities or cover surprise expenses without affecting your personal finances.


Do I need to open a business checking account as a sole proprietor? 

While you aren’t required by law to open a business checking account as a sole proprietor, it makes it easier to run your business and file taxes.

Should I pay myself a specific percentage of my business’s income?

There’s no set percentage when it comes to paying yourself as a business owner. However, you can choose a percentage-based pay structure. Just be sure that the percentage you choose takes into account your upcoming tax bills and business expenses.

How do I report my income from my business?

How you report your business income depends on several factors, but mostly on how your business is structured. For instance, a sole proprietorship’s income is included on the owner’s personal tax return. Conversely, C-corporations file a business tax return. If you’re unsure, consult with an accountant for advice on how to report your business income. 

Should I hire a bookkeeper or an accountant to manage my business’s finances? 

Hiring a tax professional to manage your business’s finances can be a good idea. Whether or not you need to do that depends on a variety of factors, such as how complex your business finances are, your own level of financial expertise, and more. Talk with a tax or financial expert for more information.

Final Thoughts

Knowing how to pay yourself as a business owner is important. There are a variety of factors that come into play as you make payroll and other financial decisions for your business. Start by considering how your business is structured, and go from there. If you need more help, don’t hesitate to speak with an accountant or business advisor who can help you decide how to pay yourself as a business owner.

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About Laurie Blank

Laurie Blank is a blogger, freelance writer, and mother of four. She’s psyched about teaching others how to manage their money in a way that aligns with their values and has been quoted in Bankrate.

She’s a licensed Realtor with Edina Realty in Minneapolis, Minnesota (also licensed in Wisconsin too) and has been freelance writing for over six years.

She shares powerful insights on her blog, Great Passive Income Ideas, that will show you how you can create passive income sources of your own.

Opinions expressed here are the author’s alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.

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