Key takeaways:

• The main ways small business owners pay themselves is through salary and/or owner’s draw. Your business structure determines which options are available to you.
• Owner draws provide flexibility but require careful tax planning, while salaries offer consistency and automatically handle tax withholding.
• Understanding the tax implications of each payment method can lead to significant savings—especially for owners of S corporations who balance reasonable salaries with distributions.

You no doubt went into business expecting to make money. To do that, your business needs to make enough money to pay its expenses—and to pay you, the small business owner.

While the “why” here is likely clear—to make money to take care of yourself and your family—the “how” can be confusing. 

How do you actually pay yourself as a business owner?

The two primary methods most small business owners will use are salary and/or owner’s draw. Your business type significantly impacts which options are available to you and how you’ll pay taxes.

Let’s explain how owners draw works. 

What is Owners Draw?

The owner’s draw method is used to describe a business owner taking money out of the company’s profits for personal use. This money is not considered a salary or wage but rather a withdrawal of the owner’s equity in the business.

This term can be confusing: you won’t find it mentioned on the IRS website, for example. Rather it’s a commonly used term used to describe how business owners take money out of their business.

Unlike a salary, a draw does not go through payroll and does not have automatic tax withholdings, but it is still considered taxable income. When you take money from your business’s profits, you’re reducing your equity account.

When you take money out of your business, it does have tax implications. The IRS expects taxes like Medicare or Social Security to be paid on wages. Other types of business income may also be taxed at your personal income tax rate. We’ll talk more about how taxes work in a moment.

How Does Owner’s Draw Work?

To take an owner’s draw, you write yourself a check, initiate a transfer from your business bank account, or even withdraw cash from your business account. (If you don’t have a business bank account, you just spend money you made in your business using whatever method you like.) 

In other words, with owner’s draw, you just take the money you want to take out of your business for your personal expenses. This gives you flexibility based on your personal needs and business performance, rather than being locked into a fixed amount.

In your accounting system, an owner’s draw reduces the owner’s equity in the business but does not count as a tax deductible business expense. It’s important to maintain clear records of all draws for accurate financial statements and tax reporting.

For example, let’s say your LLC or sole prop has $150,000 in assets and $80,000 in liabilities: the owner’s equity is $70,000.

The owner could take a draw from that $70,000 in profits, or keep some in reserve for business expenses. Either way, the business owner is expected to report and pay taxes on the net income of the business.

Owner’s Draw for Different Business Structures

Limited liability company (LLC)

An LLC has one or more members. An LLC with one member (a single-member LLC) is treated as a “disregarded entity” unless it elects to be taxed as a corporation by filing Form 8832 with the IRS. This means the IRS ignores the LLC for tax purposes and treats it as an extension of the owner.

A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and elects to be treated as a corporation. Partnerships are also treated by default as disregarded entities.

Essentially what that means in this scenario is your LLC will be treated like a sole proprietorship. The income and expenses you make will “pass through” to your personal tax returns.

Single-member LLCs taxed as sole proprietorships can take draws similarly to sole proprietors. The amount withdrawn is reported as part of personal income.

Multi-member LLCs distribute profits to owners based on their ownership percentage or according to their partnership agreement. These distributions are not subject to payroll taxes but must be reported as taxable income.

Your LLC may also choose to be taxed as an S corporation by filing two forms with the IRS:

• IRS Form 8832 to be classified as a corporation and
• IRS Form 2553 to be classified as an s corporation

That opens the door to paying yourself a salary plus owner’s draw or distributions. 

S Corporation 

Owners of S corporations must pay themselves a reasonable salary subject to payroll taxes. This is a requirement, not an option, if you actively work in the business.

Owners may also take distributions, which are taxed differently from wages but must be in addition to reasonable compensation as required by the IRS. S corporations offer potential tax advantages since distributions aren’t subject to self-employment taxes (Medicare and Social Security taxes).

For example, if your business nets $100,000, you might choose to pay yourself a reasonable salary of $60,000 (subject to payroll taxes) and take $40,000 as distributions (not subject to self-employment taxes). 

This could save you approximately 15.3% in self-employment taxes on the $40,000, or about $6,120.

This example is just for illustration: you should talk to your accounting professional about what constitutes a reasonable salary. 

(Adding to the confusion, distributions are often referred to as “owner’s draw”. Either way, the owner is taking money out of the business without withholding payroll taxes.) 

C Corporation

Owners of c corps are shareholders. If they work in the corporation they must pay themselves a salary. They can also earn dividends. Owners draw is not a factor here. 

C corporations face double taxation—the corporation pays taxes on its profits, and then shareholders pay taxes again on any dividends received. This is one reason many small business owners prefer LLCs or S corporations.

Payroll for business owners

A salary is required for owners of S corporations and C corporations who actively work in the business. Salaries are subject to payroll taxes, and the IRS mandates that salaries must be reasonable based on industry standards.

With a salary, you’ll receive payments at regular intervals (weekly, bi-weekly, or monthly) through a formal payroll process. This provides consistency for your personal finances and may make personal budgeting easier.

Some business owners try to skirt this requirement to reduce or avoid payroll taxes, but it’s risky. If the IRS challenges your assumptions you could wind up owing taxes and penalties.

Owner’s Draw vs. Salary: Differences

How are owner’s draws taxed?

Owner’s draws are subject to pass-through taxation. That just means they are reported on the owner’s personal tax return. A sole proprietor, for example, will file Schedule C with their personal 1040 income tax return to report income and expenses for the business.

Let’s say you operate as a sole proprietor, partnership or LLC that has not elected to be taxed as an S corporation.

The money you earn from your business is reported on your personal tax return and is subject to taxes like your wages in a job would be taxed, but with a crucial difference:

You are the employer so 100% of the responsibility for payroll taxes (Social Security and Medicare – FICA) falls on you. These are called “self-employment taxes”.

And since there are no payroll taxes being withheld, you’re also required to pay quarterly estimated tax payments to avoid penalties. This means managing your tax liability throughout the year rather than just at the end of the year.

For 2025, the estimated tax deadlines are: April 15, June 16, September 15 and Jan. 15, 2026.

How is salary taxed?

Remember we mentioned earlier that if you form an LLC and elect to be taxed as an S corporation, you must pay yourself a reasonable salary for work you do in your business?

You can pay yourself weekly, bi-weekly, or monthly (unless your state requires certain pay periods).

Running payroll can be confusing if you don’t have a background in accounting. That’s because you must withhold and transmit federal, state, and local taxes.

If you had a job with another employer in the past, you may remember all the deductions you saw on your paystubs. Those are now your responsibility.

In addition to salary, you may also pay yourself distributions (sometimes called “owner’s draw). Those payments don’t have taxes withheld as part of your paycheck. Instead, your income, deductions and credits from the S corp will be reported on Schedule K-1.

And yes, it’s taxable at your applicable tax rate. But it is not subject to payroll taxes (Medicare taxes and Social Security), which can result in significant tax savings.

If you take a lot of money from your business in the form of distributions, you may need to adjust your tax withholdings from your paycheck or file quarterly estimated taxes. Check with your accountant to figure out which approach is best for your situation.

Best Practices for Paying Yourself as a Business Owner

• Determine a consistent pay strategy that balances personal and business needs.
• Get and use a business bank account to pay business expenses. Pay yourself then pay personal expenses from your personal bank account.
• Use a bookkeeping system to keep track of income and expenses throughout the year.
• Make sure your business has a buffer to pay future expenses before taking a large draw.
• Always set aside money for taxes.
• If taking a salary, set an amount that aligns with IRS reasonable compensation guidelines.
• Consider how your payment approach affects your ability to build business credit, as consistent salary payments can demonstrate financial stability to lenders.

Choosing Between an Owner’s Draw and a Salary

Choosing between paying yourself via owner’s draw or salary stems out of other choices you make in your business.

What type of business do you want to operate under? 

Your choice of business entity affects your options. If you operate as a sole proprietorship, or as an LLC owner that defaults to a disregarded entity, you won’t have the option to run formal payroll. With an LLC, you’ll need to choose to be classified as an S corporation. (Not every LLC is eligible for S corp classification.)

Choosing a business entity is an important decision outside of paying yourself. Startups should think about this early on. 

How much money do you expect your business to make? 

High earners will benefit more from the salary + distributions approach than someone who is just working part-time on a business that doesn’t make a lot of money, for example. 

For high-performing businesses with significant profits, the tax advantages of S corporation status can be substantial. For a business with modest profits, the additional administrative costs may outweigh the benefits.

How is your cash flow?

Payroll requires more steady cash flow. Otherwise you’ll be adjusting your salary often, and that makes things more complicated. Consider your business performance throughout the year—is it seasonal or consistent?

With owner’s draws, you can adjust withdrawals based on current business performance, taking more money out when business is good and less when it’s slow.

What’s your budget?

Running payroll can be complicated, so many business owners outsource this task to their accountant or a payroll service. It doesn’t have to be expensive, but it is an additional recurring cost. And tax returns for a corporation are likely higher than for a sole proprietorship. In fact, it may be fairly easy to file your own taxes as a sole proprietor or disregarded LLC using accounting and tax software.

Consider whether the potential tax savings will offset these additional costs. For many businesses making over $60,000-$80,000 in profit, the answer is yes.

Do you want steady income?

Some business owners prefer to get guaranteed payments on a regular basis, though in truth nothing is guaranteed when you run a business. Whether it’s to make personal budgeting easier, or to help qualify for a personal loan or mortgage, these owners prefer a steady paycheck. If your business revenue supports that, a salary can be the way to go.

A consistent salary can also help you maintain clearer boundaries between your business and personal finances, which many business owners find helpful for long-term financial planning.

What about building business credit?

Your payment method can indirectly impact your business credit. While salary or owner’s draw won’t appear on business credit reports, a business that pays its owner a consistent, reasonable salary demonstrates financial stability and good financial management to lenders. This can be beneficial when you apply for apply for small business loans or even trade credit. Many lenders review business bank statements when evaluating loan applications.

Ultimately, your best bet is to consult with a tax professional to make sure you choose the approach that works best based on your business needs and goals.