How to Pay Yourself as a Business Owner: A Complete Guide to Getting It Right

Here's an uncomfortable truth about business ownership: many entrepreneurs don't know how to pay themselves properly. Some take too little, burning out while their personal finances suffer. Others take too much, starving their business of the capital it needs to grow. And plenty simply wing it, withdrawing money whenever they feel like it and hoping it all works out at tax time.

Getting your compensation right isn't just about putting money in your pocket. It's a strategic decision with significant implications for your taxes, your business's health, and your personal financial security.

This guide breaks down everything you need to know about paying yourself as a business owner—the methods available, how your business structure affects your options, and how to determine the right amount.

The Two Ways Business Owners Pay Themselves

At the most fundamental level, business owners have two options for compensation: an owner's draw or a salary. Understanding the difference is essential because each method has different tax implications, administrative requirements, and practical considerations.

Owner's Draw

An owner's draw is exactly what it sounds like—you draw money directly from your business profits. You might write yourself a check from the business account, transfer money to your personal account, or even take cash. The key characteristic is simplicity: no payroll processing, no tax withholding, just a direct movement of money from your business to you.

This method offers maximum flexibility. You can take money when you need it, in whatever amount makes sense at the time. There's minimal administrative overhead and no payroll provider required.

However, that flexibility comes with responsibilities. Since taxes aren't withheld automatically, you're responsible for managing your own tax obligations. This means setting aside money for taxes and making quarterly estimated tax payments to avoid penalties. For 2025, those quarterly deadlines are April 15, June 16, September 15, and January 15, 2026.

The owner's draw isn't subject to payroll taxes in the traditional sense. Instead, you pay self-employment tax on your share of business profits—currently 15.3% (12.4% for Social Security on income up to $176,100, plus 2.9% for Medicare on all income). You pay this tax whether or not you actually withdraw the money.

Salary

The salary method treats you like any other employee. You receive regular paychecks on a set schedule, with taxes automatically withheld. Your payroll includes federal income tax, Social Security, Medicare, and applicable state and local taxes.

This approach provides predictability. You know exactly how much you'll receive each pay period, and your tax obligations are handled automatically. It's easier to budget personally when your income arrives on a consistent schedule.

The salary method also builds your Social Security earnings record, which affects future benefits. And having documented W-2 income can make it easier to qualify for mortgages or other personal loans.

The downside is reduced flexibility. You can't simply grab money when you need it—you're locked into your predetermined compensation. There's also more administrative work involved: running payroll, filing payroll tax returns, and potentially paying a payroll provider.

How Your Business Structure Affects Your Options

Not every business owner can choose freely between draws and salary. Your business entity type largely determines which method you can or must use.

Sole Proprietors

As a sole proprietor, you and your business are legally the same entity. The IRS doesn't recognize a salary paid to yourself as a deductible business expense—you'd essentially be paying yourself with money that's already yours.

This means the owner's draw is your only option. You take money from your business as needed, and you pay self-employment tax on your net business profit regardless of how much you actually withdraw. The entire profit flows through to your personal tax return on Schedule C.

Partnerships and Multi-Member LLCs

Partnerships work similarly to sole proprietorships from a compensation perspective. Partners cannot receive W-2 salaries from the partnership. Instead, you take draws based on your partnership agreement, and profits flow through to your personal tax return based on your ownership percentage.

The partnership itself files an informational return (Form 1065), but doesn't pay income tax. Each partner receives a Schedule K-1 showing their share of the profits and pays tax on that amount.

S Corporations

S corporations offer the most flexibility—and the most complexity. If you're an owner who works in the business, you're required to pay yourself a reasonable salary through payroll. But beyond that required salary, you can also take distributions from company profits.

This matters because salary is subject to payroll taxes (15.3% split between you and the company), while distributions are not. Some S corporation owners see significant tax savings by keeping their salary reasonable and taking additional compensation as distributions.

However, this strategy has limits. The IRS requires your salary to be "reasonable"—meaning comparable to what you'd pay someone else to do your job. If you underpay yourself to avoid payroll taxes and the IRS catches it, you could face back taxes, interest, and penalties. Some court cases have resulted in penalties of 100% of the underpaid taxes.

C Corporations

C corporation owner-employees must receive reasonable compensation through payroll. Unlike S corporations, C corps can't pass profits through to owners without triggering corporate income tax plus personal tax on dividends (the dreaded "double taxation").

This means most C corp owners simply take a salary and leave profits in the business or pay dividends strategically based on tax planning.

Determining the Right Amount

One of the most common questions business owners ask is: "How much should I pay myself?" There's no universal answer, but several frameworks can guide your decision.

The 50-30-20 Formula

A popular approach allocates business profits as follows:

• 50% to business reinvestment (growth, equipment, reserves)
• 30% to owner compensation
• 20% to taxes and reserves

This balanced approach works well for stable, profitable businesses. It ensures you're taking care of personal needs while maintaining the business's financial health.

Revenue Percentage Guidelines

Another framework bases owner compensation on a percentage of gross revenue. The appropriate percentage varies by industry:

• Solo service businesses: 40-50%
• Small retail: 30-40%
• Restaurants: 25-35%
• Software and digital businesses: 50%+

These are rough guidelines. Your specific situation—including your operating costs, growth stage, and personal needs—should shape the final number.

The Reasonable Salary Requirement

If you're in an S or C corporation, the IRS requires you to pay yourself a "reasonable salary"—compensation that's comparable to what you'd pay a non-owner employee for similar work.

The IRS looks at several factors when evaluating whether your salary meets this standard:

• Your duties, responsibilities, and the complexity of your work
• Industry standards for similar positions in similar-sized companies
• Geographic location and cost of living
• Your training, experience, and expertise
• Time and effort devoted to the business
• The company's overall revenue and profitability

Some accountants use rules of thumb like the "60/40 rule"—60% salary, 40% distributions. But these arbitrary percentages aren't officially sanctioned by the IRS. In an audit, you'd need to justify your salary based on actual market comparables, not simple formulas.

The Social Security wage base for 2025 is $176,100. Paying yourself at least this amount (if your business can support it) maximizes your Social Security benefits while demonstrating substantial compensation.

When to Start Paying Yourself

Many new business owners wonder when they can start taking money from their business. The practical answer: when your business consistently generates enough income to cover its operating expenses with money left over.

Some entrepreneurs wait years before taking a salary, reinvesting everything into growth. Others start with modest draws of $1,000-2,000 per month within the first few months of operation.

There's no right answer. Consider your personal financial situation, your business's growth trajectory, and your ability to cover essential living expenses from other sources. If you're relying on the business for basic living expenses, you'll need to start paying yourself sooner—just be realistic about what the business can afford.

Common Mistakes to Avoid

Taking Too Little

Some owners sacrifice personal financial stability in the name of business growth. While reinvestment is important, chronically underpaying yourself leads to stress, burnout, and potentially poor decision-making. Pay yourself enough to maintain a reasonable lifestyle.

Taking Too Much

The opposite problem is just as dangerous. Withdrawing more than your business can support starves it of working capital, makes it harder to weather downturns, and limits your ability to seize growth opportunities.

Ignoring Quarterly Estimated Taxes

If you're taking draws rather than salary, quarterly estimated taxes are not optional. Missing these payments results in penalties and interest, plus a painful surprise at tax time.

Mixing Personal and Business Finances

Regardless of how you pay yourself, keep business and personal finances separate. Use distinct bank accounts, pay yourself through formal draws or payroll, and maintain clear records. This separation is essential for legal protection, tax purposes, and accurate financial tracking.

Failing to Adjust

Your compensation should evolve with your business. What worked in year one may be insufficient in year five, or excessive during a downturn. Review and adjust your compensation at least annually based on business performance and personal needs.

Getting Professional Guidance

The right compensation strategy depends on your specific situation—your business structure, profitability, personal needs, and long-term goals. While the frameworks above provide guidance, consulting with a tax professional or CPA is highly recommended.

A qualified advisor can help you:

• Structure your compensation to minimize taxes legally
• Ensure compliance with IRS requirements
• Plan for quarterly estimated payments
• Adjust your strategy as circumstances change

The cost of professional advice is usually small compared to the tax savings and peace of mind it provides.

Keep Your Compensation Records Organized

However you choose to pay yourself, maintaining clear records is essential. You need documentation of every draw or salary payment for tax purposes, and you need accurate business financials to determine appropriate compensation levels.

Beancount.io provides plain-text accounting that makes it easy to track owner compensation alongside all your other business transactions. Every draw, every payroll entry, and every distribution is recorded in human-readable format that you fully control—no black boxes, no vendor lock-in. Get started for free and build the kind of financial clarity that makes compensation decisions straightforward.