How to pay yourself as a business owner

One of the most common questions entrepreneurs face after launching a business is: “How do I pay myself?” It may seem simple, but the way you pay yourself as a business owner depends heavily on your business structure, financial health and long-term goals. Paying yourself properly is crucial for both your personal finances and your business’s sustainability.

Let’s break down the different ways to pay yourself, key considerations and best practices to do it legally and wisely.

1. Know Your Business Structure

The first step is understanding your business entity. The structure you choose—whether a sole proprietorship, partnership, LLC, S corporation or C corporation directly impacts how you’re allowed to take money out of the business.

Sole Proprietorship & Single-Member LLC

If you’re a sole proprietor or a single-member LLC (disregarded entity for tax purposes), you don’t technically “pay” yourself a salary. Instead, you take an owner’s draw from the business profits.

You do this by transferring money from the business bank account to your personal account. It’s not considered payroll, so no taxes are withheld at the time of the draw, but you must report that income and pay self-employment taxes on it.

Partnerships

In a general partnership or multi-member LLC, partners typically take **distributive shares of the profits** based on their ownership percentage. Like with sole proprietorships, this isn’t considered salary but rather partner distributions. Some partnerships may also provide guaranteed payments to partners for their work.

S Corporations

As an S corp owner who actively works in the business, the IRS requires that you pay yourself a “reasonable salary”through payroll. This means you must withhold taxes like a regular employee. After that, you can take additional income through dividends or distributions, which are typically not subject to self-employment tax—giving S corp owners potential tax savings.

C Corporations

C corp owners are considered separate from the business entirely. If you’re a shareholder and work in the business, you must be paid a salary through payroll, with taxes withheld. Any profits distributed to you as a shareholder are considered dividends, which are subject to double taxation (corporate tax + dividend tax).

2. Determine a “Reasonable” Compensation

What qualifies as “reasonable” compensation depends on your role, industry, and how much someone in a similar position would earn. Underpaying yourself (especially in an S corp) to avoid payroll taxes can trigger IRS scrutiny.

To determine a fair salary:

* Research average wages for your role and industry.
* Consider your experience, hours worked and responsibilities.
* Keep documentation to support your pay rate.

If your business isn’t profitable yet, you may choose to delay payment, but that’s not a sustainable long-term solution.

3. Separate Personal and Business Finances

One of the golden rules of business finance is to keep personal and business accounts separate. Open a dedicated business checking account and pay yourself from it in a structured way—either through payroll or scheduled transfers, depending on your business type.

This protects your business’s financial integrity, simplifies taxes and helps build credibility with banks, investors, and the IRS.

4. Consider Taxes and Withholding*l

As a business owner, you’re responsible for making sure taxes are paid correctly—whether through payroll withholding or quarterly estimated tax payments.

Sole proprietors and partners: You’ll likely need to pay quarterly estimated taxes for income and self-employment tax.
* S corp and C corp owners: You’ll need to withhold federal and state income taxes, Social Security, Medicare, and unemployment taxes from your salary through a payroll service.

Neglecting taxes can lead to penalties, audits, or even legal trouble, so it’s important to work with a CPA or tax professional to ensure compliance.

5. Be Mindful of Cash Flow

Even if your business is profitable on paper, that doesn’t mean you should take all the profits out. Cash flow can fluctuate, especially in early or seasonal businesses. It’s wise to:

* Leave enough cash in the business to cover expenses.
* Build an emergency reserve.
* Reinvest in growth (marketing, hiring, equipment, etc.).

Aim to strike a balance between fair compensation and healthy business finances.

6. Use Payroll Services or Accounting Tools

If your business structure requires a salary, using payroll software like Gusto, QuickBooks Payroll or ADP can automate the process, handle tax withholdings and generate W-2s for tax season.

For simpler setups like owner’s draws, use accounting tools (e.g., Wave, FreshBooks, or Xero) to record the withdrawals accurately and stay on top of your books.

Paying yourself as a business owner is more than just taking money out of the till .It’s a legal, financial and strategic decision. Start by identifying your business structure, understanding tax implications and maintaining financial discipline.

By compensating yourself appropriately and consistently, you’ll not only sustain your lifestyle but also build a healthier, more professional business that can grow
and support others in the long run.

Author: Moureen Koech

Moureen Koech is a passionate Digital Journalist, an adept Agribusiness Writer with a keen eye for news and an impactful story-teller,whose stories provide key value to Agripreneurs and stakeholders in the Agricultural sector