How to Pay Yourself as a Business Owner (LLC, S Corp)

Small businesses have lots of expenses to stay on top of. There are team salaries, rent, utilities, vendors, and everything else in between. Because of this, your own salary might become an afterthought.

But here's the reality: you can't work for free. And figuring out how to legally pay yourself isn't as simple as writing a check. Your business structure determines your payment options—and getting it wrong means IRS penalties, back taxes, and audit risk.

Once you understand the two main payment methods (salary or owner's draw), you'll know exactly how to pay yourself while staying compliant. Let's break it down.

TL;DR: How to pay yourself as a business owner

Quick answer: How you pay yourself depends entirely on your business structure.

Two payment methods exist:

• Owner's draw: Withdraw money directly from profits. No payroll, but you handle quarterly taxes.
• Salary: Fixed paycheck through payroll with automatic tax withholding and a W-2 at year-end.

Your payment method by business type:

• Sole proprietors: Owner's draw only
• Partnerships: Draws or guaranteed payments
• LLCs (default): Owner's draw
• LLCs electing S-corp status: Required salary + optional distributions
• S corporations: Required salary + optional distributions
• C corporations: Required salary

Tax implications:

• Owner's draw: Pay 15.3% self-employment tax + income tax on all profits via quarterly payments
• Salary: Automatic withholding for 15.3% FICA + federal/state income tax

Bottom line: Sole props and default LLCs use draws. S-corps and C-corps must use payroll. LLCs can elect S-corp status for tax savings when profits exceed certain thresholds.

How to pay yourself: Salary vs. owner's draw

Two main methods exist. Here's what they mean and who can use each.

Owner's draw

An owner's draw lets you withdraw money directly from business profits whenever needed. Transfer funds from business to personal account. No fixed schedule or amount. No automatic tax withholding. You handle quarterly estimated payments.

Who uses it: Sole proprietors (only option), partnerships (only option), default LLCs (only option), and S-corps (in addition to required salary).

The flexibility is great—you can adjust the amount based on business performance. But you're responsible for your own tax withholdings, which means quarterly payments and extra planning.

Salary

Paying yourself a salary means adding yourself to payroll and receiving a paycheck like the rest of your team. Set regular paycheck amount. Automatic tax withholding (federal, state, FICA, Medicare). Processed through payroll system. Receive W-2 at year-end.

Who uses it: S-corps (required by IRS), C-corps (required by IRS), and LLCs electing corporate tax status.

Salaries give you a clear picture of your business's health. If your payroll system flags it can't afford to pay you, you've got a cash flow problem. But you need consistent cash flow to maintain regular payroll.

Key differences

• Flexibility: Draw = any amount, any time (within available funds). Salary = fixed amount, consistent schedule.
• Taxes: Draw = you manage quarterly payments and save for your tax bill. Salary = automatic withholding each paycheck.
• Best for: Draw = variable income, solo operations, early-stage businesses. Salary = stable income, corporate structures, IRS compliance.

How to pay yourself based on your business structure

Your entity type dictates your payment options. Here's exactly what to do for your situation.

Sole proprietorship: Owner's draw only

Payment method: Owner's draw (your only option)

Why: The IRS considers you and your business the same entity—you can't employ yourself.

The process: Transfer funds from business to personal account. Record as "owner's draw" in accounting. No payroll setup needed.

Tax reality: You'll pay self-employment tax of 15.3% on ALL business profits, plus income tax. These taxes apply whether you take draws or leave money in the business. Make quarterly estimated payments: April 15, June 15, September 15, and January 15. Save 25-30% of each draw for taxes. Report profits on Schedule C with your personal tax return (Form 1040).

Partnership: Draws or guaranteed payments

Payment methods: Partner draws OR guaranteed payments

Partner draws: Based on ownership percentage (50% owner = 50% of profits). Simple transfer from business to personal account. Timing per partnership agreement.

Guaranteed payments: Fixed payment for services (like salary but not W-2). Paid regardless of profitability. Common when partners contribute different work levels.

Tax treatment: Each partner receives Schedule K-1 showing profit share. You'll pay self-employment tax (15.3%) plus income tax. Make quarterly estimated payments.

LLC: Depends on your tax election

LLCs offer flexibility—you choose how the IRS taxes you.

Single-member LLC (default: Taxed as sole proprietor)

You're not considered an employee. Simply transfer profits from business to personal account through owner's draws. No payroll taxes are withheld. Instead, you'll pay self-employment tax and income tax on all profits via quarterly payments. Report everything on Schedule C.

Multi-member LLC (default: Taxed as partnership)

Your operating agreement dictates profit distribution. Own 60% of the LLC? You get 60% of profits. Each member receives Schedule K-1. All members pay self-employment tax on their share.

LLC electing S-corp status (file Form 2553)

This is the tax-saving strategy many profitable LLCs use.

How it works: Pay yourself reasonable salary through payroll with tax withholding and W-2. Then take additional profits as distributions—these avoid the 15.3% self-employment tax.

The tax advantage: Let's say your LLC generates $100,000 profit. As default LLC, you'd pay 15.3% self-employment tax on the entire $100,000 = $15,300 (plus income tax). As S-corp, you might pay yourself $60,000 salary (15.3% FICA = $9,180) plus $40,000 distribution (0% self-employment tax). Your annual savings: about $6,120.

The IRS requirement: Your salary must be "reasonable" for the work you perform. The IRS watches this closely.

Red flags: Paying yourself $20,000 salary when your business generates $150,000 revenue. Paying yourself far below what you'd pay someone else to do your job. Taking zero salary and only distributions.

When it makes sense: Many tax professionals suggest considering S-corp election when LLC profits exceed $50,000-$75,000 annually, though the exact threshold depends on your specific situation.

The trade-off: You'll need to run payroll, file quarterly payroll tax returns, and submit an annual 1120-S corporate return. You'll also need professional tax preparation. If you're considering this election, tools like Homebase make the payroll piece straightforward with automatic tax calculations.

S corporation: Salary + distributions

If your business is an S-corp, you must pay yourself a salary if you're actively involved in running the business.

IRS requirements: You MUST pay yourself reasonable salary through payroll. You MUST withhold payroll taxes. You MUST file quarterly payroll tax returns. You CANNOT take only distributions to avoid payroll taxes.

How to split your compensation: The salary portion should reflect actual work you perform and be comparable to industry standards. Subject to full payroll taxes (15.3% FICA plus federal and state income tax). The distribution portion is taken from remaining profits, requires positive owner's equity, and escapes the 15.3% self-employment tax (you only pay income tax).

A common approach: A 60/40 or 50/50 split between salary and distributions, depending on your actual duties and industry standards.

C corporation: Salary required

C-corp business owners who are actively involved in the business must be paid reasonable compensation through payroll with W-2.

Why dividends are rare: C-corps face double taxation on dividends. The corporation pays tax on profits at the corporate level (21% federal rate), then shareholders pay tax again on dividend income (15-20%). Most C-corp owners stick with salary and bonuses (tax-deductible business expenses).

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How to set up payroll to pay yourself

If you're an S-corp, C-corp, or LLC electing corporate tax status, you'll need to set up payroll.

Step 1: Get your EIN and register as an employer

What you'll need: Employer Identification Number (EIN) from IRS—apply at IRS.gov for free (takes about 10 minutes). State tax ID from your state's revenue department. State unemployment insurance account. Workers' compensation policy (if required by your state). Timeline: Complete registration typically takes 2-4 weeks.

Step 2: Determine your reasonable salary

The IRS requires S-corp and C-corp owners to pay themselves "reasonable salary" in line with their job duties, education, skills, and experience.

How to research market rates: Bureau of Labor Statistics (BLS.gov) offers official government salary data by occupation and location. Glassdoor, Payscale, and Indeed provide real-world salary reports. Industry associations often publish compensation surveys. Local competitors' job postings reveal what others are paying.

Safe harbor approach: Pay yourself what you'd pay someone else to do your job.

Audit risk warning: Unreasonably low salaries trigger IRS scrutiny. When in doubt, err higher.

Step 3: Choose your payroll method

You have three options: Manual/DIY (free but high error risk), hire an accountant (professional but costly per run), or use payroll software (recommended for most owners).

If you're running a small team: Homebase makes owner payroll simple. Add yourself as an employee in under 10 minutes. The app handles automatic tax calculations for all 50 states, payroll tax withholding, quarterly filing, W-2 generation, and direct deposit. Pricing: $39 per month base fee plus $6 per month per active employee.

Step 4: Run your first payroll

Enter your salary amount. Review automatic tax calculations—federal income tax, state income tax, Social Security (6.2% employee plus 6.2% employer), and Medicare (1.45% employee plus 1.45% employer). Confirm direct deposit details. Submit payroll. Receive your paycheck via direct deposit (typically 2 business days later). At year-end, you'll receive W-2 showing your total wages and tax withholdings.

How to take an owner's draw

For sole proprietors, partnerships, and default LLCs, draws are your payment method.

The four-step process

1. Step 1: Check your available funds. Review your balance sheet to confirm positive owner's equity (you can't draw more than your equity balance). Check that upcoming expenses are covered. Maintain 3-6 months of operating expenses as a cash cushion.
2. Step 2: Transfer the funds. Bank transfer from business to personal account. Or write yourself a check. Label the transaction as "owner's draw."
3. Step 3: Record the transaction properly. In your accounting software, record the draw as an equity withdrawal—not as a business expense. Draws don't reduce your business's taxable income.
4. Step 4: Set aside money for taxes immediately. The draw itself isn't taxed, but your business profits ARE taxed whether you take draws or not.

What you'll owe: All business profits. Self-employment tax of 15.3%. Income tax based on your personal tax bracket.

Your tax strategy: Save 25-30% of each draw in a separate "tax savings" account. Make quarterly estimated tax payments using IRS Form 1040-ES (due April 15, June 15, September 15, January 15).

Avoiding penalties: Pay at least 90% of your current year's tax or 100% of your prior year's tax (110% if you're a high earner with adjusted gross income over $150,000) through quarterly payments.

When should you start paying yourself?

You can start paying yourself when your business generates consistent revenue that covers operating expenses PLUS your salary.

• Typical timeline: Months 1-6, focus on revenue growth with minimal or no owner pay. Months 6-12, start modest draws as cash flow stabilizes. Year 2 and beyond, transition to regular salary or consistent draws.
• Green lights: Three or more consecutive profitable months. 3-6 months of operating expenses in business account. All obligations easily met. Revenue reliably exceeds expenses.
• Red flags: Revenue doesn't consistently cover expenses. Taking owner pay prevents paying vendors or team. Business relies on your personal funds.
• Start small: Many successful owners begin with modest draws of $1,000-2,000 per month and increase gradually. Some business owners don't take a salary in the first few years—they reinvest profits back into growing the business.

How much should you pay yourself?

There's not one answer that applies across the board. Here are four proven methods.

Method 1: Market rate approach

Pay yourself what you'd earn as an employee doing your job at another company. Visit BLS.gov for official government salary data. Check Glassdoor, Indeed, and Payscale for real-world reports. Best for S-corps and C-corps that need to justify "reasonable compensation."

Method 2: Percentage of revenue

Take 30-50% of your business revenue as owner compensation.

General guidelines (these vary significantly based on your specific business): Solo service businesses = 40-50%. Small retail = 30-40%. Restaurants = 25-35%. SaaS/digital = 50%+.

Method 3: Needs-based approach

Calculate your personal financial requirements and work backward. List monthly personal expenses. Add savings goals. Add estimated tax liability (25-30% if taking draws). Multiply by 12.

Method 4: Hybrid approach (most common)

Combine a modest base salary with profit-based draws or distributions. This provides consistent personal income plus flexibility during lean months. For S-corps, distributions avoid self-employment tax.

Don't forget these factors

Leave 3-6 months of operating expenses in business. Budget for growth investments. Don't deplete working capital. For S-corps and C-corps, your salary can't be too low or you'll face audit risk. Small business owner compensation varies widely depending on your location, industry, and years in business.

Tax implications of paying yourself

Self-employment tax (15.3%)

Who pays it: Sole proprietors, partnerships, and default LLCs

What it covers: Social Security: 12.4% (on income up to $176,100 in 2025). Medicare: 2.9% (on all income). Total: 15.3%.

Key point: Self-employment tax is calculated on your net business profit whether you take draws or not. Your profit equals your income to the IRS. You'll make quarterly estimated tax payments using IRS Form 1040-ES.

Payroll taxes

Who pays it: S-corp and C-corp owners taking salary

What's withheld: Federal income tax. State income tax. Social Security: 6.2% (employee). Medicare: 1.45% (employee).

What your business pays: Social Security: 6.2% (employer). Medicare: 1.45% (employer). Federal unemployment tax (FUTA): 0.6%. State unemployment tax (SUTA): varies by state.

Total FICA: 15.3%—same rate as self-employment tax, just split between you and your business.

The S-corp tax advantage

As a sole proprietor: $100,000 profit = 15.3% self-employment tax on entire $100,000 = $15,300 (plus income tax).

As an S-corp: $60,000 salary (15.3% FICA = $9,180) + $40,000 distribution (0% self-employment tax). Total FICA: $9,180.

Your annual savings: About $6,120 in self-employment taxes.

The catch: You must pay yourself "reasonable salary" first. You'll need to set up payroll and file additional tax returns (quarterly payroll returns plus annual 1120-S), which typically requires professional tax preparation.

Quarterly estimated taxes

Who must pay: Business owners taking draws who expect to owe $1,000 or more in taxes for the year.

Payment schedule: Q1: April 15. Q2: June 15. Q3: September 15. Q4: January 15.

Safe harbor rule: Pay the lesser of 90% of your current year's tax liability, OR 100% of your prior year's tax liability (110% for high earners).

Penalty for underpayment: Underpayment penalties add up, so it's better to overestimate than underestimate.

Common mistakes to avoid

Taking too much too soon

Draining business cash before stable revenue creates problems. You can't cover unexpected expenses, miss vendor payments, and face stress during slowdowns. Start with conservative draws and increase gradually.

Mixing personal and business finances

Using your business account for personal expenses creates an accounting nightmare. You face confusion at tax time, lose valuable deductions, create IRS audit red flags, and if you're an LLC, risk losing liability protection. Maintain completely separate bank accounts.

Forgetting about quarterly taxes

Spending draw money without setting aside funds for taxes catches many new owners off guard. Save 25-30% of every draw in a separate "tax savings" account immediately. Make quarterly estimated payments on time.

Underpaying your S-corp salary

Paying yourself $20,000 salary when your S-corp generates $200,000 revenue to maximize distributions backfires. The IRS audits you, reclassifies distributions as wages, and you owe back taxes plus penalties. Pay yourself a market-rate salary first.

How to pay yourself as a business owner FAQs

Do I need to pay myself minimum wage?

For sole proprietors, partnerships, and default LLCs: No minimum wage requirement. You can take draws in any amount (within equity limits). For S-corps and C-corps: You must pay yourself "reasonable salary," typically a market rate for your role—usually well above minimum wage.

How do I pay myself from my LLC with no employees?

Default LLC (single-member): Take owner's draws. Simply transfer money from business to personal account. No payroll setup required. Pay self-employment tax through quarterly estimated payments. LLC electing S-corp status: Must set up payroll and pay yourself reasonable salary with proper tax withholding. Receive W-2 at year-end. Can also take distributions to save on self-employment taxes.

What's the difference between owner's draw and dividends?

Owner's draw: Used by sole proprietors, partnerships, and default LLCs. Withdraw ownership share directly. Not a separate taxable event. Dividends: Used by C-corporations. Taxed twice—at corporate level and again on personal return. S-corp distributions: Pass-through distributions that avoid self-employment tax.

Should I pay myself salary or dividends?

S-corps: You need BOTH. Salary first (required by IRS), then distributions from remaining profits. C-corps: Salary usually better. Dividends face double taxation. LLCs and sole proprietorships: Use owner's draws instead.

Pay yourself the right way

Learning how to pay yourself as a small business owner might not be at the top of your priority list, but it can save you from stress later down the road. You can give yourself a fair salary, get a good picture of your finances, and avoid cash flow issues.

Homebase makes it easy to set yourself up as a W-2 employee and pay yourself properly. You'll get automatic tax calculations for all 50 states, one-click payroll processing, and direct deposit in 2 days—all for $39 per month base fee plus $6 per active employee.

Whether you're paying yourself for the first time or managing a growing team, Homebase takes the guesswork out of payroll. Try it for free.