How to Pay Yourself as a Business Owner (Without Overpaying in Taxes)

You started a business to make money, but how do you actually pay yourself? And more importantly, how do you do it in a way that minimizes taxes?

Whether you run an LLC, S-Corp, or sole proprietorship, how you take money from your business affects your taxes, cash flow, and IRS compliance. Let’s break down the best way to pay yourself while keeping more of your hard-earned profits.

1. How Business Structure Affects Your Pay

Your business structure determines how and when you can pay yourself:

Business Type	How You Get Paid	Tax Treatment
Sole Proprietorship	Owner’s Draw	Self-employment tax (15.3%) + income tax
LLC (Single-Member)	Owner’s Draw	Self-employment tax (15.3%) + income tax
LLC (Multi-Member)	Distributions	Self-employment tax (if active) + income tax
S-Corp	Salary + Distributions	Salary taxed normally, distributions avoid self-employment tax
C-Corp	Salary + Dividends	Salary taxed normally, dividends taxed separately

📌 Key Takeaway: If you’re an LLC or sole proprietor, you’ll likely take draws, while S-Corp owners split income between salary and distributions for tax savings.

2. Paying Yourself as a Sole Proprietor or Single-Member LLC

✅ How to Pay Yourself: Take an owner’s draw by transferring money from your business to your personal account. No payroll required.✅ Taxes: You’ll pay income tax + self-employment tax (15.3%) on all profits, not just what you withdraw.

📌 Example: If your business earns $75,000, you’re taxed on the full amount—even if you only withdraw $50,000 for yourself.

🚀 Pro Tip: Set aside 30-40% of profits for taxes and make quarterly estimated payments to avoid IRS penalties.

3. Paying Yourself as an S-Corp Owner (And Saving on Taxes!)

✅ How to Pay Yourself: Take a reasonable salary and additional distributions.✅ Tax Advantage: Only your salary is subject to self-employment tax—distributions are not.

📌 Example: If your business earns $100,000, and you take a $50,000 salary, only that salary is taxed at 15.3% self-employment tax. The remaining $50,000 as distributions is not subject to self-employment tax, saving you thousands.

🚀 Action Step: Set up payroll for your salary (even if you're the only employee). You’ll file Form 1120-S at tax time.

4. How Much Salary Should an S-Corp Owner Take?

The IRS requires S-Corp owners to take a reasonable salary based on industry standards.

✅ A good rule of thumb: Pay yourself 40-60% of business profits as salary.

Net Profit	Suggested Salary	Distributions
$50,000	$25,000	$25,000
$100,000	$50,000	$50,000
$200,000	$80,000	$120,000

📌 Pro Tip: Check salary comparison tools like Bureau of Labor Statistics or Glassdoor to justify your pay in case of an audit.

5. Paying Yourself as an LLC (Electing S-Corp Taxation)

If your LLC earns $50,000+ in profit, you may want to elect S-Corp taxation to save on self-employment taxes.

✅ How to Switch: File Form 2553 with the IRS.✅ New Pay Structure: You’ll start taking a salary + distributions, just like an S-Corp.✅ Tax Savings: You’ll only pay self-employment tax on your salary, not on distributions.

🚀 Best For: Business owners earning at least $50,000 net profit who want to reduce tax liability.

6. Common Mistakes to Avoid

🚫 Not setting aside enough for taxes – Owner’s draws aren’t taxed automatically; set aside 30-40% of profits.🚫 Taking too low of a salary as an S-Corp owner – The IRS may reclassify distributions as wages and hit you with penalties.🚫 Mixing personal and business accounts – Keep finances separate for tax and legal protection.🚫 Not making estimated tax payments – Avoid IRS penalties by paying quarterly estimated taxes.

Final Thoughts: The Best Pay Strategy for You

✅ If you’re a sole proprietor or LLC – Take owner’s draws, but set aside money for taxes.✅ If you own an S-Corp – Take a reasonable salary + tax-free distributions to minimize self-employment tax.✅ If your LLC makes $50K+ in profit – Consider S-Corp election for tax savings.

📌 Need help structuring your pay? Let’s make sure you’re paying yourself the smart way—https://www.glavinicfs.com/bookandrew.