How you pay yourself as a business owner depends first on how the business is taxed. Sole proprietors, partners and owners of LLCs taxed under the default rules take an owner’s draw, moving money from the business account to a personal account with no payroll involved. Owners of an S corporation who work in the business are paid wages through payroll and can take distributions on top. C corporation owners who work in the business draw a salary, and any profit paid out beyond that comes as dividends.
The second question, how much, is where most owners struggle. Take too little and the household ends up running on personal credit cards. Take too much and the business has nothing left for taxes, repairs or the next big purchase. A sustainable figure starts from real profit, sets money aside for taxes and a reserve, and, for seasonal businesses, includes planning for the slow months so the owner’s income holds steady when revenue drops.
The Three Ways Owners Get Paid
Owner’s draw. If you run a sole proprietorship, a partnership, or an LLC taxed as either one, you generally cannot put yourself on payroll. You transfer money to yourself when the business can spare it. A draw is not taxed as a separate event. You owe income tax and self-employment tax on the business’s profit for the year, whether you drew all of it, some of it or none of it, which is why owners in this group usually make quarterly estimated tax payments.
Salary plus distributions. An S corporation, or an LLC that has elected S corporation tax treatment, works differently. The IRS states that S corporations must pay reasonable compensation to a shareholder-employee for the services they provide before non-wage distributions may be made. That salary runs through payroll with withholding and employment taxes. The IRS can reclassify distributions as wages when the salary is set too low, and its factors for judging what is reasonable include the owner’s training and experience, duties, time and effort, and what comparable businesses pay for similar services.
Salary and dividends. In a C corporation, an owner who works in the business is an employee paid a salary, which the company deducts. Profit paid out beyond that comes as dividends, which the company cannot deduct and the owner pays tax on again personally.
Because the tax treatment differs so much, confirm the structure with an accountant before you set a number, especially if you are weighing an S corporation election.
How Much Should You Pay Yourself?
Start from profit, not revenue. Revenue tells you what came in; profit tells you what the business can spare after it pays its own bills.
Imagine a residential painting company run as a single-member LLC. The owner’s planning assumptions for the coming year are below. The tax and reserve percentages are illustrations, not tax advice.
| Step | Planning assumption | Amount |
| Revenue, trailing 12 months | From the books | $360,000 |
| Operating costs, excluding owner pay | From the books | $270,000 |
| Profit before owner pay | Revenue minus costs | $90,000 |
| Tax set-aside | 30 percent of profit | $27,000 |
| Business reserve | 10 percent of profit | $9,000 |
| Available for owner pay | What remains | $54,000 a year |
That works out to $4,500 a month. If the household needs more than that, the answer lies in pricing, costs or volume. Raising the draw would only borrow from the tax account.
Keep the Pay Steady, Even When Revenue Is Not
A fixed amount on a fixed schedule is easier to live on and easier to plan around than irregular transfers. A few habits help:
- Separate the accounts. Keep business and personal money apart, and move your pay on the same dates each month.
- Hold the tax money somewhere else. A separate savings account for taxes keeps the quarterly payments from turning into a scramble.
- Bank the peak months. The painting company might earn most of its revenue from April through October. Paying $4,500 every month and moving each peak month’s surplus into the reserve means the winter draws come from money the business has already earned.
- Review quarterly. Raise your pay when profit supports it for two or three quarters in a row, not after one strong month.
When the Business Cannot Pay You Yet
Many owners pay themselves little or nothing in the first year. That can be a reasonable choice if it is a decision with an end date. Write down the minimum your household needs, track the gap each month, and set a date by which the business should cover it.
If that date keeps slipping, look hard at the model. Outside capital can bridge a timing gap, such as a slow season or a large job that pays late. It cannot fix prices that are too low or costs that are too high, and borrowing to cover an owner’s pay in a business that is not yet profitable only postpones that conversation.
Frequently Asked Questions
Can I pay myself a salary from my LLC?
It depends on how the LLC is taxed. A single-member LLC taxed as a sole proprietorship pays its owner through draws. If the LLC elects S corporation treatment, the owner who works in the business goes on payroll and takes a salary.
Is an owner’s draw taxable?
The draw itself is not a separate taxable event. Sole proprietors and partners pay income and self-employment tax on the business’s profit, whether or not they draw it out.
How much should I pay myself in my first year?
Start with the minimum your household needs and compare it with the business’s actual profit after taxes and a reserve. If profit cannot cover it yet, set a target date and track progress monthly.
What is reasonable compensation for an S corporation owner?
It is a salary in line with what the business would pay someone else to do the same work. The IRS looks at factors such as experience, duties, time spent and what comparable businesses pay.
Should I keep paying myself during a slow season?
Yes, if the pay was set from annual profit and the peak months’ surplus went into a reserve. A steady draw that the reserve covers is safer than stopping and restarting pay.
