How to Pay Yourself: A Guide for Every Business Structure

Starting your own business is a thrilling endeavor, but understanding how to pay yourself from your business can be challenging for new owners. The method you choose depends heavily on your business structure, whether it’s a sole proprietorship, partnership, LLC, S corporation, or C corporation.

Some of these, like sole proprietorships, partnerships, corporations, and LLCs, are legal entity types you choose when you form your business. Others, like an S Corporation, are tax classifications you can elect with the IRS.

Each option has unique implications for taxes, compliance, and financial planning. Choosing the right approach can help you stay compliant, minimize tax liability, and maintain healthy cash flow. This guide walks through the primary ways to pay yourself so you can make informed decisions that benefit your personal and business finances.

Sole Proprietorship

A sole proprietorship isn’t a separate legal entity — the owner and the business are legally the same. You don’t receive a salary or wages. Instead, you take an owner’s draw from your profits by transferring money from the business account to your personal account as needed.

• Taxes: You pay federal income tax and self-employment tax (Social Security and Medicare) on your net business profit, not the amount you withdraw.

• Best practice: Keep detailed records of all draws and set aside funds for quarterly estimated taxes to avoid penalties.

Partnership

A general partnership works like a sole proprietorship with two or more owners sharing profits and responsibilities. Profits are typically distributed according to the partnership agreement. Partners don’t receive a salary but take distributions similar to a sole proprietor’s draw.

• Taxes: Each partner reports their share of profits on their personal tax return, whether or not they withdraw those funds. Most general partners pay self-employment tax on their distributive share, but some limited partners may be exempt from certain income.

• Best practice: Document all distributions and make quarterly estimated tax payments to stay ahead at tax time.

Limited Liability Company (LLC)

An LLC is a legal entity formed at the state level. Its default tax treatment depends on the number of members, but owners can elect a different status — such as S Corporation — with the IRS.

• Single-member LLC: Paid like a sole proprietor — take draws and pay self-employment tax on net profits.

• Multi-member LLC: Paid like a partnership — take distributions and pay tax on your share of profits.

• LLC taxed as an S corporation: Pay yourself a reasonable salary as an employee (subject to payroll taxes) and take additional profit distributions not subject to payroll taxes.

Best practice: If you elect S corp status, document how you determined your salary using industry data to meet IRS “reasonable compensation” rules.

S Corporation

An S Corporation isn't a separate legal entity — it's actually a tax status you can elect for your LLC or corporation by filing with the IRS (Form 2553). In an S Corp, you must pay yourself a reasonable salary for the work you perform. This salary is subject to federal income tax withholding and payroll taxes.

• Distributions: You can also take profit distributions, which are not subject to payroll taxes, potentially reducing your overall tax bill.

• IRS caution: Setting your salary too low to avoid payroll taxes can trigger an audit.

• Best practice: Use comparable salary data to support your pay level and keep documentation on file.

C Corporation

A C corporation is the default tax classification for corporations unless you elect S corporation status with the IRS. In a C Corp, you are considered an employee and receive a salary subject to income tax withholding and payroll taxes. You may also receive dividends from after-tax corporate profits.

• Taxes: C corps pay corporate income tax on profits, and dividends are taxed again on your personal return (“double taxation”).

• Best practice: Dividends are optional; some owners choose to retain earnings or adjust salary to balance tax efficiency and reinvestment.

Choosing the Right Pay Strategy

The right way to pay yourself depends on your entity type, tax goals, and cash flow needs.

Factors to consider include:

• Self-employment and payroll tax obligations

• IRS “reasonable salary” requirements

• Administrative needs like payroll filings and bookkeeping

• Quarterly estimated tax responsibilities

Pro tip: Always keep business and personal finances separate by maintaining a dedicated business bank account and accurate payment records. Changing your entity type or tax classification can impact how you pay yourself — sometimes even mid-year — so it is best to consult a tax professional before making changes.

The Bottom Line

Paying yourself from your business isn’t one-size-fits-all. Each structure — from sole proprietor owner’s draws to C corporation salaries and dividends — has its own tax rules, benefits, and trade-offs.

Partnering with a tax professional can help you navigate these differences, avoid costly mistakes, and stay ahead of deadlines. For personalized guidance, consider connecting with 1-800Accountant, a trusted Swyft Filings partner offering small business tax support.

Related Resources:

• Forming an S Corporation: Pros and Cons

• C Corp vs S Corp vs LLC: Which is right for you?

• Small Business Income Taxes