Getting paid for the business you've worked hard to build is pretty exciting. But, knowing how to pay yourself, how much to take out, and how to handle the taxes can be confusing (especially when you're just starting out).
The right approach depends on a bunch of different factors, including your business structure, how your business is taxed, and how much cash you can afford to take out without jeopardizing operations.
In this guide, you'll learn how to choose a payment method, calculate your compensation, establish a payment schedule, and avoid common tax and cash-flow mistakes. You'll also learn how Gusto can help business owners manage payroll without slowing down.
1. Determine your business structure and tax classification
Before deciding how to pay yourself, make sure you know your business entity and how your business is classified for federal tax purposes. These details determine the method you’ll use to pay yourself.
For example, an LLC is a legal business structure—not a tax classification. Depending on the number of owners and elections made, an LLC may be taxed as a sole proprietorship, partnership, or corporation.
Here's a quick overview:
Business structure or tax classification | Typical way the owner gets paid |
Single-member LLC taxed as a disregarded entity | Owner's draw |
Partnership or LLC taxed as a partnership | Distributions and, where appropriate, guaranteed payments |
Payroll wages for shareholder-employees who perform services, potentially plus distributions | |
Salary or wages for an owner who works as an employee; dividends may also be possible |
Keep in mind that the above are just general guidelines. Your specific circumstances, elections, ownership arrangements, and state law may affect the details.
If you're unsure how your business is classified, consult your accountant or tax professional before setting up payments.
For more information, see the IRS guide to paying yourself.
2. Choose the right way to pay yourself
Once you understand your business structure and tax classification, you can determine the appropriate payment method.
The two common methods are an owner's draw and a salary. Depending on your structure, you may also receive distributions, dividends, or guaranteed payments.
Owner's draw
An owner's draw is money you withdraw from your business for personal use. It's commonly used by sole proprietors, owners of single-member LLCs taxed as disregarded entities, and partners in partnerships.
For example, if you own a consulting business and want to transfer $2,000 from your business bank account to your personal account, you might record the transfer as an owner's draw.
How are owner's draws taxed?
An owner's draw generally isn't a separate taxable event simply because you withdrew the money. Instead, your tax obligations depend on the business income and the tax rules that apply to your business.
For example, a sole proprietor generally reports business profit on their individual tax return and may owe income tax and self-employment tax on that profit, even if some of the money remains in the business account.
That means you shouldn't assume that money left in the business is tax-free or that withdrawing money creates a second tax on the same income.
Who typically uses an owner's draw?
Sole proprietors.
Owners of single-member LLCs taxed as disregarded entities.
Partners who take distributions from a partnership.
An LLC taxed as an S corporation or C corporation follows different rules. Don't assume that every LLC owner can take an owner's draw.
Salary or wages
A salary is compensation paid to an employee for work performed. It typically runs through payroll, with applicable income-tax withholding, employment taxes, and reporting.
If you operate a corporation and work in the business, you may be an employee of that corporation.
S corporation shareholder-employees must receive reasonable compensation for the services they perform before non-wage distributions are made to them. The appropriate amount depends on factors such as responsibilities, experience, time spent working, and comparable compensation.
C corporation owner-employees generally receive wages for their services. Dividends, when appropriate, are a separate type of payment and have their own tax treatment.
Who typically receives a salary?
S corporation shareholder-employees.
C corporation owners who work as employees.
Other employees of your business, including you where the applicable rules require it.
Distributions, dividends, and guaranteed payments
Some business structures have additional payment methods:
Partnership distributions: Partners may receive distributions under the partnership agreement. A distribution is not necessarily the same as taxable income.
Guaranteed payments: A partnership may pay a partner for services or the use of capital, subject to applicable partnership tax rules.
S corporation distributions: Shareholders may receive distributions in addition to appropriate wages. Distributions do not replace required reasonable compensation.
C corporation dividends: A corporation may distribute profits to shareholders when legally and financially appropriate. Dividends are not the same as salary.
If you're considering changing how your business is taxed to alter your compensation options, talk with a tax professional first. Changing tax classification can have legal, administrative, and tax consequences.
Pro tip: Choose your payment method based on your actual business structure and tax classification; do not simply pick which method appears easiest.
3. Determine how much to pay yourself
Choosing the right payment method is only half the equation. You also need to decide how much your business can afford to pay you.
There is no universal salary or percentage of revenue that works for every small-business owner. Your compensation should reflect your business's finances, your role, your tax obligations, and your personal needs.
Here's a practical process to help you determine an appropriate amount.
Step 1: Review your financial statements
Start with your profit-and-loss statement, balance sheet, and cash-flow information.
Your profit-and-loss statement shows revenue, expenses, and profit over a given period. Your cash-flow information helps you understand how much money is actually available.
These numbers aren't interchangeable. A profitable business can still experience a cash shortage because of unpaid invoices, debt payments, inventory purchases, or other factors.
Step 2: Account for business expenses and obligations
Before taking money out, be sure to account for:
Rent, supplies, software, and other operating expenses.
Employee wages, payroll taxes, and benefits.
Loan payments and other outstanding obligations.
Income taxes and any required estimated tax payments.
Cash reserves for emergencies and slower business periods.
Planned investments in equipment, inventory, or growth.
The amount remaining after these obligations is a better starting point for deciding what you can afford to withdraw.
Remember that a payment to yourself isn't always a deductible business expense. The treatment depends on your business structure and the type of payment.
Step 3: Consider your responsibilities and market compensation
If your business structure requires or involves a salary, consider the work you perform.
Ask yourself:
What responsibilities do I handle each week?
How much time do I spend working in the business?
What would it cost to hire someone else to perform similar duties?
What do comparable businesses pay people in similar roles?
How much of the business's revenue comes from my personal work versus employees, equipment, or other resources?
For an S corporation shareholder-employee, these factors can help inform reasonable compensation. The IRS considers several factors, including duties, experience, time devoted to the business, and comparable pay.
For other business structures, the same analysis can help with budgeting, but it doesn't create a universal legal salary requirement.
Step 4: Factor in your personal financial needs
Your personal budget matters, too.
Calculate the amount you need to cover housing, food, insurance, transportation, debt payments, and savings. Then compare that amount with what your business can sustainably provide.
If your business cannot yet support your desired income, consider a realistic interim payment and a plan for reviewing it as revenue and cash flow improve.
Step 5: Set a sustainable amount and review it regularly
Once you've considered business obligations, cash reserves, and personal needs, establish an initial payment amount.
For example, imagine your business generates $12,000 in monthly revenue. After operating expenses, payroll, debt obligations, and other business costs, it has $3,000 remaining in cash before accounting for additional tax payments and planned reserves.
That $3,000 is not automatically your available personal income. You still need to assess upcoming obligations, tax liabilities, and the minimum cash balance your business needs.
If only $1,000 is safely available after those considerations, withdrawing $1,000 may be more prudent than taking the full $3,000.
(Keep in mind that the scenario above is an illustrative example, not a recommended salary or tax calculation.)
Review your compensation whenever your financial circumstances change significantly. If your business experiences seasonal swings, you may need a more conservative approach than a business with predictable recurring revenue.
Pro tip: Don't rely on a blanket rule such as setting aside 30% of revenue or paying yourself 30% of profit. Your appropriate compensation and tax reserves depend on your circumstances. A CPA can help estimate your tax obligations and establish a sustainable plan.
4. Choose a payment schedule
Once you've determined the appropriate method and amount, decide how frequently you'll receive payments.
Common payroll schedules include:
Weekly.
Every two weeks (biweekly).
Twice a month (semimonthly).
Monthly, where permitted.
For a sole proprietor taking an owner's draw, the timing is generally more flexible than employee payroll, subject to applicable legal, financial, and contractual restrictions.
If you're an employee of your own corporation, payroll frequency requirements may apply under state law. Requirements differ by state and sometimes by employee classification.
You should also consider your business's cash-flow cycle. A predictable payment schedule can make personal budgeting easier, but your business must have enough cash to meet its obligations.
For current state employee payday requirements, consult the U.S. Department of Labor's state payday guidance and your state labor department.
5. Set up the payment process
Now it's time to put your compensation plan into practice, but your steps depend on the payment method.
If you're taking an owner's draw:
Confirm that a draw is appropriate for your business structure.
Check your available cash and upcoming obligations.
Transfer the money from the business account to your personal account.
Record the transfer accurately in your bookkeeping system.
Review your tax reserves and business cash balance regularly.
Keep business and personal finances separate. This helps maintain accurate records, simplifies tax preparation, and can be particularly important for preserving the separation between you and a legal business entity.
If you're paying yourself through payroll:
Confirm your business's payroll and tax registrations are in place.
Establish an appropriate salary and payment schedule.
Configure applicable withholding and employment-tax settings.
Run payroll and provide the required wage statements.
Deposit and report payroll taxes according to the applicable deadlines.
Retain payroll records and review your filings.
Payroll software can automate many administrative tasks, but you remain responsible for choosing the correct business setup and ensuring that your information and filings are accurate.
What records should you keep?
Maintain appropriate records of:
Business bank statements and transfers.
Bookkeeping entries and financial statements.
Payroll registers, wage statements, and tax filings, where applicable.
Records supporting compensation decisions.
Partnership agreements or corporate resolutions, where relevant.
Tax payments and supporting documentation.
Your exact recordkeeping requirements depend on your business structure and applicable law.
6. Avoid common owner-compensation mistakes
A few preventable mistakes can create tax problems or leave your business short of cash, so be sure to avoid these:
Treating all LLCs the same. Remember that an LLC is a business entity, not a tax classification. An LLC's tax classification affects whether its owner takes draws, receives wages, or uses another method.
Assuming an owner’s draw determines your taxable income. Sole proprietors generally owe tax on business profit, not simply on the amount withdrawn.
Paying yourself too much too soon. A large withdrawal can leave your business unable to cover payroll, rent, debt, taxes, or other obligations.
Using an arbitrary salary percentage. A percentage of revenue or profit isn't a substitute for a cash-flow forecast or the applicable compensation rules.
Ignoring reasonable compensation requirements. S corporation shareholder-employees who perform services generally need appropriate wages before non-wage distributions.
Mixing personal and business transactions. Keep accounts separate and document owner payments correctly.
Missing payroll or estimated-tax deadlines. Plan for taxes throughout the year rather than waiting until filing time to find out what you owe.
Changing your payment method without checking the consequences. Switching from an owner's draw to payroll may involve a tax-classification election or other changes. The correct process depends on your situation.
Frequently asked questions
How much should I pay myself from my business or LLC?
There's no universal amount. Your compensation depends on your business's tax classification, cash flow, expenses, obligations, reserves, and personal financial needs.
Start by reviewing your financial statements and forecasting upcoming costs. Then determine what compensation the business can provide while thriving. If you're an S corporation shareholder-employee, you should use the reasonable-compensation rules to determine your salary.
Don't assume that a fixed percentage of revenue or profit is appropriate for every business.
When should a business owner start paying themselves?
You can begin taking appropriate owner payments when your business finances and applicable rules allow it. The right time depends on whether the business can meet its obligations while supporting the withdrawal.
A new business might need to reinvest most of its cash initially, while an established business with predictable revenue may support regular compensation sooner.
You should also plan for your personal financial needs rather than assuming you must wait until the business reaches a particular age or revenue milestone.
How often should I pay myself?
Owners taking draws may have flexibility in when they transfer money, although they should follow sound bookkeeping and cash-flow practices.
Owners receiving wages through payroll must follow the applicable payroll schedule and legal requirements. Weekly, biweekly, semimonthly, and monthly schedules are common, but the permitted frequency depends on the relevant rules.
What records should I keep when paying myself?
Keep records of transfers, business transactions, bank statements, bookkeeping entries, and tax payments. If you receive wages, retain payroll records and tax filings. Corporate owners may also need compensation documentation and relevant corporate records.
Consult your accountant about the records applicable to your structure and circumstances.
How does paying myself affect business cash flow?
Owner payments reduce the cash available to meet other obligations. The impact depends on the payment type and business structure, but every compensation plan should account for operating expenses, debt, taxes, reserves, and planned investments.
A business can report a profit and still lack sufficient cash to make a large withdrawal. Review both profitability and cash flow before setting your payment amount.
Can I change how I pay myself later?
Yes, but the process depends on your business structure and tax classification.
For example, an owner of a single-member LLC taxed as a disregarded entity generally doesn't simply start receiving wages from that same business as though it were a separate corporation. An election to change tax classification may be needed for a different treatment, and that election can have consequences.
An S corporation owner-employee may receive wages and distributions, subject to the relevant rules. Before making a change, consult a tax professional.
Do I have to pay taxes on an owner's draw?
An owner's draw generally isn't taxed as a separate transaction just because money is withdrawn. However, the business income associated with the draw may be taxable, and self-employment tax may apply depending on your circumstances.
Corporate distributions and dividends follow different rules. Don't assume all owner payments receive the same tax treatment.
How to use Gusto to pay yourself
Once you've identified the right compensation method, payroll software can help simplify the administrative side of paying yourself and your employees.
Can I use Gusto to pay myself as a small-business owner?
Yes! You can use Gusto to pay any of your employees, even if it’s just you for now. Gusto automates payroll and taxes, so you stay compliant and have more time to focus on growing your operation. Learn more about our payroll services.
How do I get set up on Gusto?
You can get set up on Gusto in just a few clicks by signing up for a plan. If you’re setting up payroll for the first time, start here with our comprehensive list of everything you need to know. If you need help switching from your current payroll provider to a Gusto plan, check out our simple guide to switching. If that doesn’t answer all of your questions, you’ll receive the support our customers rave about on social media.
How much does Gusto cost?
We’ll never surprise you with hidden fees. Check out flexible pricing and offers here.
This article is for general educational purposes and isn't individualized tax, legal, or accounting advice. Federal and state rules can vary, and tax guidance may change. Consult a qualified professional about your circumstances.
