How to pay yourself from your business
How you pay yourself from your business depends on one thing: how the business is taxed. A sole proprietor takes an owner's draw, an S corp owner takes a salary plus distributions, and the rules for each are different.
Getting it right matters. The wrong method can cost you payroll tax, blur the line between business and personal money, or draw attention from the IRS.
The short answer, by business type
| How the business is taxed | How you pay yourself | How it's taxed |
|---|---|---|
| Sole proprietorship or single-member LLC | Owner's draw: move money from the business account to yours | You pay income and self-employment tax on the profit, whatever you take out |
| Partnership or multi-member LLC | Draws or distributions, plus guaranteed payments for work you do | Each partner pays tax on their share of profit and on guaranteed payments |
| S corp | A reasonable salary through payroll, then distributions | Payroll tax on the salary; distributions carry no Social Security or Medicare |
| C corp | A salary through payroll, and dividends | Payroll tax on salary; the company pays tax on profit, and dividends are taxed again |
Your taxes don't depend on what you take out
For a sole proprietorship, partnership or S corp, the profit flows through to your personal return. You owe tax on your share of the profit whether you take the cash out or leave it in the business. Taking a draw or a distribution doesn't create more tax, and leaving money in doesn't save any.
That's why setting money aside for taxes comes first. Profit you leave in the business still shows up on your return in April.
If you own an S corp
An S corp owner who works in the business has to pay a reasonable salary before taking distributions. The salary runs through payroll with Social Security, Medicare and withholding. The profit above it can come out as distributions, which is where the S corp's tax savings come from.
Distributions have to follow ownership. If you own 70% and a partner owns 30%, distributions are split 70/30. Uneven distributions can put the S corp election at risk.
How much to take
Start from the cash in the business, not the profit on paper. Take away what the business owes, the taxes on this year's profit, the bills coming up, and a cushion of a few months' costs. What's left is what you can safely take out.
Keep business and personal money apart
- Pay yourself by moving money from the business account to your personal account, not by paying personal bills from the business.
- If the business owes you for something you paid personally, reimburse it with a receipt, and for an S corp, under a written reimbursement plan.
- Record each transfer the same way every time, as a draw, a distribution or payroll, so your books and your CPA see the same thing.
Common mistakes
- Taking distributions from an S corp with no salary, or a salary far below what the work is worth.
- Spending everything that comes out, then owing tax in April with nothing set aside.
- Paying personal expenses directly from the business account.
- Taking uneven distributions from an S corp with more than one owner.
Common questions
Is an owner's draw taxable?
Not by itself. A sole proprietor is taxed on the business's profit, not on what they draw. The draw just moves money you've already been taxed on, or will be.
Can I pay myself a salary from my LLC?
A single-member LLC taxed as a sole proprietorship can't put the owner on payroll; you take draws. If the LLC elects to be taxed as an S corp, you can and should pay yourself a salary.
How often should I pay myself?
A steady schedule, such as monthly or twice a month, makes personal budgeting easier and, for an S corp salary, is part of what makes it look like real wages.
What if the business has a bad month?
That's what the cash cushion is for. Many owners pay themselves a steady amount and take extra only after the quarter closes and the cushion is full.
Related
Cratchit keeps the books for every company, shows what's safe to take out, forecasts the next 13 weeks of cash, and tells you what needs your attention. Take a guided tour with the Harpers, a sample family.
Try the demoEducation, not advice. Confirm the details for your business with your CPA.