how to pay yourself as a business owner 7

How To Pay Yourself as a Business Owner in 2025

Owner’s draws entail less administrative overhead compared to payroll, because you don’t need a payroll provider to facilitate them. There’s also no specific schedule for owner’s draws, meaning you can take them as your cash flow permits or as you need to. If your business is structured as a partnership or LLC, owner’s draws may be subject to the terms specified in the partnership agreement or operating agreement. Instead of drawing money freely, owners take profit distributions based on an operating agreement. Since an LLC isn’t taxed like a corporation, all profits pass through to owners, who report them on personal tax returns. When it’s time to adjust your pay, the process will depend on your business structure.

How to Make Sure You Get Paid as a Business Owner

The more you systematize your pay, the more stable and stress-free your business — and your life — will be. This method, created by Mike Michalowicz, is a game-changer for entrepreneurs who want a predictable, sustainable way to handle income. By the end, you’ll know exactly how to pay yourself confidently — and how to track it so you stay compliant and stress-free.

When to seek professional advice: Legal and tax considerations

Choosing the proper way to pay yourself can help you avoid IRS issues and optimize your tax situation. If you’re unsure whether your compensation strategy aligns with your business structure, it’s time for a review. You can create a large tax deferral by paying yourself a bonus if you have a corporate year-end in the last half of the calendar year. You have 180 days to pay a bonus while still being allowed to take a deduction in your corporation. It may be advantageous to maintain a consistent payment schedule, and keeping good records is always paramount.

Mistakes to avoid when paying yourself

It’s common for owners of smaller corporations to how to pay yourself as a business owner take a modest salary and top it up with dividends from profits. The IRS expects business owners, especially S-Corp owners, to take a reasonable salary, one that aligns with what someone in your role would earn at another company. If you underpay yourself to avoid payroll taxes, you could trigger an audit. A partnership business structure is when two or more people control the business and are personally liable for all business debts.

Setting Yourself Up for Success

Ensure you’re prepared for tax obligations by setting aside a portion of your income throughout the year. Doing so avoids unexpected tax bills and potential financial strain. When in doubt, consulting with a tax professional can help ensure you’re on the right track. Once you’ve determined this, research salary ranges for similar positions in your area.

The drawback of using this as your main payment method is that you’ll pay self-employment taxes on all the money that comes into your business, instead of on only a designated salary. If your business is your main source of income, you might instead pay yourself a salary as an employee and take an owner’s draw on additional profits. Homebase can help you overcome roadblocks and spot pitfalls when adding yourself to your payroll. Our HR and Compliance tools ensure you’re not breaking any state or federal laws when you set up your payments.

You can also deduct the amount of your draw, or draws – the money you pay yourself back from your investment into the company. This money is not taxed when you do the draw, and it can be deducted as an expense. When determining how much to pay yourself as a business owner, it can help to start with a ballpark estimate of how much you need to earn to support yourself. Figure out the total amount of your personal expenses, including housing, food, transportation, insurance, and car payments. Having a firm grasp of your personal expenses will help you determine your desired compensation. The tax amount a sole proprietor should pay depends on their net business income and the specific tax rates in their country.

Instead of a paycheck, you take an owner’s draw, pulling money from business earnings as needed. If you’re a sole proprietor paying yourself as needed through an owner’s draw, figuring out a reasonable salary can be even trickier. You want to bring home enough to cover your household expenses, but you don’t want to withdraw so much that your business struggles. Look at your average monthly budget and the average pay for someone in your field while you decide on a fair paycheck.

Forgetting to Put Aside Money for Taxes

• A sole proprietor usually compensates themselves through an owner’s draw, which involves directly withdrawing funds from the profits of their business.
• By regularly reviewing and adjusting your compensation, you ensure that your pay remains fair and in line with your business’s growth and your personal financial needs.
• Research the pros and cons, as well as tax implications, of each choice of specific business structure.
• Try Shopify for free, and explore all the tools you need to start, run, and grow your business.

No matter your circumstances, consult an accountant or tax attorney to help you choose the right approach for your business. You can take money out of your business account in any form you want—e.g., cash, paper or electronic checks, ACH payments, PayPal or Venmo. However you do it, you’re responsible for applicable income and self-employment taxes on your business income. This approach could also be complex because you have to claim taxes as both the LLC owner and for your work as a contractor (as a sole proprietor or as the owner of a separate LLC).

• But without proper planning, this flexibility can create financial headaches.
• They are typically taxed on their business’s profit and may need to account for self-employment taxes, making it essential to keep accurate financial records.
• You must pay yourself a salary through the payroll process, and that salary is subject to both income and payroll taxes.
• An accountant or bookkeeper can help you figure out how to pay yourself as a business owner.

An owner’s salary is the regular payment made to a business owner for their work in the company. It is similar to a salary earned by an employee, but in this case, the owner is paying themselves for their role in the business. The owner’s salary is often determined based on factors like the owner’s responsibilities, industry standards, and the financial health of the business.

How to Choose the Best Way to Pay Yourself

In certain business structures, particularly S corporations, you are required to pay yourself a reasonable salary. This means the salary should be comparable to what someone in your position would earn in the marketplace. Underpaying yourself to avoid taxes could result in IRS penalties.