How to pay yourself as a business owner: salary or draw

Published Friday 16 January 2026

Table of contents

• How to pay yourself as an LLC, sole proprietor, or corporation
• Owner's draw vs salary: what's the difference
• Step-by-step guide to paying yourself
• Tax implications of different payment methods
• How much to pay yourself
• How to pay yourself fairly as a business owner
• Manage your business finances with confidence
• FAQs on paying yourself as a business owner

Key takeaways

• Choose your payment method based on your business structure: sole proprietors and single-member LLCs take owner's draws, while corporations require salary payments with proper payroll tax withholdings.
• Set aside 25-30% of each owner's draw in a separate tax account to cover income and self-employment taxes, since these aren't automatically withheld like they are with salary payments.
• Balance your personal financial needs with business cash flow requirements by maintaining 30-90 days of operating expenses in reserve while ensuring your payments cover living expenses and retirement savings.
• Establish a consistent payment schedule whether taking draws or salary to create predictable income for household budgeting and maintain clear separation between business and personal finances.

How to pay yourself as an LLC, sole proprietor, or corporation

Business owner compensation depends entirely on your legal business structure. Each structure has specific payment methods and tax requirements.

If you haven't formally registered a business entity, you're automatically a sole proprietor. Here's how each structure works.

How to pay yourself as an LLC

LLC owners have two main payment options based on their tax election:

Option 1: Owner's draw (default tax treatment)

• How it works: Withdraw cash directly from business profits
• Tax treatment: Treated as sole proprietor or partnership

Option 2: Salary plus dividends (corporate tax election)

• How it works: Pay yourself a regular salary, supplement with profit distributions
• Tax treatment: Treated as S-Corporation or C-Corporation

LLCs don't have their own payment rules. Your tax election determines your payment method.

How to pay yourself as a sole proprietor or partnership

Sole proprietors and partners take owner's draws by transferring money from business to personal accounts. According to the IRS, partners are not employees and should receive distributions or guaranteed payments rather than a W-2 salary.

Here’s how an owner's draw typically works in your accounting records:

• Payment method: Transfer funds directly from business bank account
• Tax treatment: Withdrawals count as taxable business profit
• Tax timing: Pay income and self-employment taxes at year-end

Set aside 25-30% of each draw in a separate tax account to cover your tax bill.

How to pay yourself as an S corporation

If you own an S corporation (S corp), you typically pay yourself with a mix of salary and profit distributions to help minimize taxes.

Salary component:

• How it works:Regular payroll with tax withholdings
• Tax treatment: Subject to income and payroll taxes
• Business impact: Reduces business taxable income

Dividend component:

• How it works: Distribute remaining profits to owners
• Tax benefit: No payroll taxes on dividend portion
• IRS requirement: Salary must be 'reasonable' for your role

Get tax advice

A salary can provide stability, but it also comes with extra admin and costs when you operate as a corporation. An accountant or tax professional can help you run the numbers and decide whether this structure is the best fit for you.

Owner's draw vs salary: what's the difference

The two main ways to pay yourself are an owner's draw or a salary. The right choice depends on your business structure and financial goals. Understanding the difference helps you stay compliant and manage your cash flow effectively.

What is an owner's draw?

An owner's draw is when you take money out of your business for personal use. It's a common method for sole proprietors, partners, and some LLC members. A draw is flexible, so you can take money as needed, but it's not a business expense and you're responsible for setting aside money for taxes.

What is a salary?

A salary is a fixed, regular payment you receive from your business, just like any other employee. Your business withholds income and payroll taxes from your paycheck automatically. This method is required if your business is a corporation, including an LLC taxed as a corporation. If you do not run payroll and withhold the right taxes, you could be liable for a trust fund recovery penalty.

Key differences between owner's draw and salary

Choosing between a draw and a salary comes down to your business structure. A draw offers flexibility and is common for sole proprietorships and partnerships. A salary provides a predictable income with automated tax withholding, which is a requirement for corporations.

Step-by-step guide to paying yourself

Once you know which payment method fits your business, the process is straightforward. Following these steps helps you maintain clear financial records and stay organized.

Steps for taking an owner's draw

Here's how to take a draw from your business:

1. Check your business cash flow to make sure you have enough funds to cover expenses after the draw.
2. Transfer the money from your business bank account to your personal bank account.
3. Record the transaction in your accounting software as an 'owner's draw' to keep your books accurate.
4. Set aside a portion of the draw in a separate savings account for your estimated income and self-employment taxes.

Steps for paying yourself a salary

1. Set up payroll using compliant software or a payroll service.
2. Determine a 'reasonable compensation' for your role based on your industry and experience.
3. Run payroll according to a set schedule, such as weekly or bi-weekly.
4. Your salary, with taxes already withheld, will be deposited into your personal account.

Record-keeping requirements

No matter how you pay yourself, keeping clean records is essential. It helps you clearly separate business and personal finances, which simplifies tax preparation and gives you a true picture of your business's health.

Tax implications of different payment methods

How you pay yourself directly affects how and when you pay taxes. Each method has different rules, so it's important to know what to expect at tax time.

Tax treatment of owner's draws

An owner's draw is not considered a business expense, so you can't deduct it from your business income. However, the IRS allows you to deduct one-half of your self-employment tax when figuring your adjusted gross income. Instead, you pay personal income tax and self-employment taxes on all of your business's net profits for the year, regardless of how much you actually drew.

According to the IRS, you must generally pay self-employment tax if you have net earnings of $400 or more.

Tax treatment of salaries

A salary paid to you as an owner-employee is a deductible business expense, which can lower your business's taxable profit. You pay personal income tax and your share of Federal Insurance Contributions Act (FICA) taxes (Social Security and Medicare) on your wages, which are withheld from each paycheck.

Self-employment tax considerations

If you're a sole proprietor or partner, you pay self-employment tax on your entire business profit. For S corporation owners, you only pay these taxes on your salary. Any additional profit you take as a distribution is not subject to self-employment tax, which can lead to tax savings. This avoids the self-employment tax rate, which includes 12.4% for Social Security and 2.9% for Medicare, on that portion of your income.

How much to pay yourself

Determining your payment amount requires balancing business cash flow requirements with personal financial needs.

What the business needs

Business cash requirements:

• Operating expenses: Track all bills and due dates to avoid cash flow gaps. Set aside funds for quarterly tax payments.
• Emergency reserves: Maintain 30-90 days of expenses for unexpected disruptions or revenue drops.
• Growth investments: Reserve funds for equipment, marketing, and professional services that drive business growth.

What the household needs

Personal financial requirements:

• Living expenses: Monthly costs for housing, food, utilities, and debt payments
• Insurance coverage: Health, disability, and liability insurance (previously employer-provided)
• Retirement savings: Self-funded retirement contributions (401k, IRA, or SEP-IRA)

Finding a balance

There will be negotiable items in both the home and business budgets. Be prepared for some give and take, especially during the early days of your business.

How to pay yourself fairly as a business owner

Pay yourself consistently at regular intervals to maintain stable personal finances.

Best practices:

• Regular schedule: Weekly, bi-weekly, or monthly payments
• Fixed amounts: Predictable income helps with household budgeting
• Business reserves: Maintain emergency funds to avoid personal financial stress

Consistent personal income lets you focus on business decisions without financial pressure.

An accountant or bookkeeper can help you decide how much to pay yourself as a business owner. They can also help you set a pay amount for today and a plan to adjust it as your business grows.

Manage your business finances with confidence

When you pay yourself in a consistent, compliant way, you take a big step toward financial clarity and peace of mind. With a clear view of your business's cash flow, you can make confident decisions about your pay and investments.

Xero gives you real-time financial insights, so you always know where your business stands. Run your business, not your books. Get one month free.

FAQs on paying yourself as a business owner

Here are answers to some common questions about paying yourself as a business owner.

Is it legal to transfer money from a business account to a personal account?

Yes, it is legal, but you must do it correctly based on your business structure. For a draw, you can transfer funds, but you must record it as an owner's draw. For a salary, the money must be processed through payroll. Keeping business and personal finances separate is key to staying compliant.

Should you pay yourself as a business owner?

Yes, paying yourself is important for personal financial stability and helps you maintain a clear separation between your business and personal finances. It also forces you to manage your business's cash flow realistically. How you do it, either through a draw or salary, depends on your business structure and cash flow.

What is the most tax efficient way to pay yourself as a business owner?

For owners of an S corporation, taking a reasonable salary and then taking additional profits as distributions is often the most tax-efficient method. This is because distributions are not subject to self-employment taxes. For other structures, tax efficiency comes from careful planning and setting aside money for taxes throughout the year.

How often should I pay myself as a business owner?

If you take a salary, you'll be paid on a regular schedule like any employee (e.g., bi-weekly or monthly). If you take draws, you have more flexibility. However, it's a good practice to set a consistent schedule for draws to create predictability for both your personal and business budgets.

Do I need to pay payroll taxes when I pay myself?

If you pay yourself a salary, then yes. Your business is responsible for paying the employer's share of payroll taxes, and your share is withheld from your paycheck. If you take an owner's draw, you don't pay payroll taxes directly, but you do pay self-employment taxes on your business profits.