When you launch a small business, you dream of freedom, flexibility, and (hopefully) a profitable future. But let’s be honest—one of the most puzzling questions that comes up early is: “How do I pay myself?” After all, you’re not just the boss; you’re also often the bookkeeper, marketer, janitor, and coffee supplier.
Figuring out how and when to pay yourself as a small business owner isn’t just about grabbing whatever’s left in the bank account. It’s a strategic process that affects everything from your taxes to your future growth. Let’s walk through the key methods of paying yourself, how payroll fits into the picture, and what smart business owners do to keep it all clean and compliant.
First, Know Your Business Structure
The way you get paid largely depends on how your business is legally set up. Here’s how it typically breaks down:
Sole Proprietorships & Partnerships
If you’re operating as a sole proprietor or in a general partnership, you’re not considered an employee of the business. That means you don’t receive a traditional paycheck through payroll. Instead, you take what’s called an owner’s draw—you withdraw funds from the business for personal use.
Keep in mind: you’ll pay self-employment taxes on the income you draw, and you’ll need to make quarterly estimated tax payments to the IRS. Yes, the IRS wants its piece early and often.
LLCs (Limited Liability Companies)
For single-member LLCs, the IRS treats you like a sole proprietor. So, same rules: take an owner’s draw, report it on your personal taxes, and keep your estimated payments on track.
Multi-member LLCs are treated like partnerships, and each member takes a draw according to the ownership agreement. However, LLCs can elect to be taxed as an S-Corporation, which changes how owners are compensated. More on that in a moment.
S Corporations and C Corporations
If your business is an S Corp or C Corp, you must be on payroll if you’re doing work for the business. The IRS insists that shareholders who provide services to the company receive a “reasonable salary,” subject to standard payroll taxes.
In this case, you wear two hats: you’re both an employee and an owner. You’ll pay yourself a salary through payroll, and you might also take additional compensation through dividends or distributions, depending on the corporation’s profits.
Why Payroll Matters for Small Business Owners
When you’re on payroll, taxes are withheld automatically. You avoid underpayment penalties, and everything is tracked in an orderly, government-approved fashion. For S Corp owners, being on payroll also satisfies IRS rules that protect your business status.
But beyond compliance, payroll has strategic benefits:
- It creates consistency. A regular paycheck makes it easier to manage your personal finances.
- It builds credibility. Want to apply for a mortgage or loan? Lenders love pay stubs.
- It simplifies taxes. No guesswork about what you owe—your taxes are withheld automatically.
This is where Payroll Complete comes in. We specialize in helping small business owners like you set up and manage payroll the right way—whether you’re ready to run a W-2 salary or you’re still in owner-draw territory.
How Much Should You Pay Yourself?
Ah yes, the million-dollar question—hopefully, quite literally.
The answer depends on a few factors:
- What can the business afford? Don’t starve the company to feed your wallet. Pay yourself a reasonable amount based on cash flow.
- What would you pay someone else to do your job? The IRS uses this logic when determining “reasonable compensation” for S Corp owners.
- What are your personal needs? You started this business for freedom, but bills still need paying.
Many owners start with a modest draw or salary and increase it as the business becomes more profitable. The key is to set a routine and stick to it, rather than treating the business bank account like a personal ATM.
Tips to Pay Yourself the Smart Way
Here’s how successful small business owners approach compensation:
- Separate your accounts. Your business and personal funds should never mix.
- Use payroll software or a service. This ensures accurate tax withholding, timely filings, and legal compliance.
- Track everything. Whether it’s a draw or a paycheck, document the transaction and categorize it properly in your books.
- Talk to your accountant. Each situation is unique, and the tax implications can be significant.
Final Thoughts: Your Paycheck Reflects Your Planning
Getting paid as a small business owner isn’t about crossing your fingers and seeing what’s left. It’s a deliberate process tied to how your business is structured, how profitable you are, and how disciplined your financial practices are.
The good news? You don’t have to figure it all out alone. At Payroll Complete, we’ve helped countless small business owners understand their payroll options, stay compliant with IRS rules, and streamline their pay processes so they can focus on running their businesses.
If you’re still unsure whether you should be on payroll, taking draws, or some combination of both—let’s talk. We’ll help you make sure the boss (that’s you!) gets paid properly.
For more information on how to pay yourself as a business owner, visit the links below:
How to Pay Yourself as a Business Owner
3 Point Plan for Growth Toward Your Highest Potential