How to Pay Yourself as a Business Owner: Salary, Draw, or Distribution?

One of the most common questions new business owners ask is: "How do I pay myself?" The answer depends on your business structure — and the method you choose has real tax implications.

You pay yourself through an owner's draw — simply transferring money from your business account to your personal account. There's no payroll involved.

Tax treatment: All net profit from your business is taxable income, regardless of how much you actually draw. You pay income tax and self-employment tax (15.3%) on the entire net profit — not just what you draw.

Partners take guaranteed payments or distributions from the partnership. Guaranteed payments are subject to self-employment tax; distributions generally are not (but the underlying income is).

S-Corp owners who work in the business must pay themselves a reasonable salary through payroll. This is a legal requirement — not optional.

After paying yourself a reasonable salary, remaining profits can be taken as distributions, which are not subject to payroll taxes. This is the core tax advantage of the S-Corp structure.

What's a "reasonable salary"? The IRS requires it to be comparable to what you'd pay someone else to do your job. Underpaying yourself to maximize distributions is a red flag.

C-Corp owners who work in the business are employees and must be paid a salary through payroll. Dividends paid to shareholders are not deductible by the corporation and are taxed again on the shareholder's personal return.

If you've elected S-Corp status, you must run payroll for yourself. This means:

• Setting up a payroll system
• Withholding and depositing payroll taxes
• Filing quarterly Form 941 and annual W-2

This is one of the added costs of the S-Corp structure — but for most business owners, the tax savings far outweigh the payroll cost. Use our S-Corp Salary Calculator to see your estimated savings in 60 seconds, or see our S-Corp vs. LLC tax comparison for a detailed breakdown with real numbers.

• S-Corp vs. LLC: Which Is Better for Your Taxes?
• How to Pay Yourself as an LLC Owner
• S-Corp Election: Could It Save Your Business Thousands?
• LLC Bookkeeping: What Every Owner Needs to Know
• Our Payroll Services
• Contact Us

Need help setting up payroll or figuring out the right compensation structure? The Gap ProAdvisors handles payroll and tax planning for small business owners. Contact us.