Best Ways to Pay Yourself as a Business Owner

“How should I pay myself?” is one of the first questions we hear from new business owners, and one of the most consequential to get right. It affects your personal tax bill, your IRS compliance, and how much you actually keep at the end of the year.

Below we break down the rules for each structure so you know what applies to your situation.

Sole Proprietors and Single-Member LLCs

If you operate as a sole proprietor or a single-member LLC that hasn’t elected a different tax status, you don’t pay yourself a salary. You take what’s called an owner’s draw: you simply transfer money from the business to yourself.

Here’s the part that catches people off guard: you owe tax on your business profits whether you withdraw the money or leave it sitting in the business account. The IRS doesn’t care that you didn’t touch it.

Tax considerations:

• Business income is reported on Schedule C of your personal return.
• You’ll owe self-employment tax (15.3% on the first $184,500 in 2026) on top of income tax.
• Quarterly estimated tax payments are typically required, so don’t wait until April.

Partnerships and Multi-Member LLCs

In a partnership, owners typically take distributions rather than paychecks. Some partners also receive guaranteed payments, fixed amounts paid regardless of whether the business is profitable, and treated differently for tax purposes.

Like sole proprietors, partners are taxed on their share of the income whether or not they actually withdrew the cash. This surprises a lot of people.

Tax considerations:

• Each partner receives a Schedule K-1 reporting their share of income, deductions, and credits.
• General partners typically owe self-employment tax on their distributive share; limited partners generally do not.
• Guaranteed payments are subject to self-employment tax and must be reported as income in the year received.
• Quarterly estimated payments are usually required.

S Corporation Owners

This is where the rules get stricter, and where we see the most IRS problems. If you own and actively work in an S corporation, you are required to pay yourself a reasonable salary through payroll before taking any distributions. This is not optional.

The IRS has been consistent and aggressive on this point. S corp owners who try to avoid payroll taxes by skipping the salary and taking everything as distributions are a known audit target. The penalty is reclassification of distributions as wages, plus back payroll taxes, interest, and penalties.

Tax considerations:

• Your salary is reported on a W-2 and is subject to payroll taxes (Social Security and Medicare).
• Remaining profits pass through to your personal return on a Schedule K-1.
• Those pass-through profits are generally not subject to self-employment tax. This is the core tax benefit of S corp status.
• You still owe federal and state income tax on pass-through profits, even if you leave the money in the business.
• Estimated tax payments may still be required if your payroll withholding doesn’t cover your full liability.
• What counts as a “reasonable salary” depends on your role, time spent, industry, and what you’d pay someone else to do your job. This is an area where working with a CPA matters.

C Corporation Owners

C corporation owners can receive compensation in several forms: salary, bonuses, and dividends. Each is taxed differently, and the combination you choose has real consequences.

The well-known downside of C corp structure is double taxation: the corporation pays tax on its profits, and then shareholders pay tax again when those profits are distributed as dividends. That said, C corps offer flexibility that other structures don’t — including the ability to retain earnings in the business at the corporate tax rate and certain benefit deductions that aren’t available to pass-through entities.

Tax considerations:

• Salaries and bonuses paid to owner-employees are deductible by the corporation, which reduces the double-tax problem.
• Dividends are not deductible by the corporation, so they are taxed twice: once at the corporate level, once at the shareholder level.
• Qualified dividends are taxed at preferential rates (0%, 15%, or 20% depending on your income), which softens the blow.
• C corps are subject to their own tax calendar and filing requirements separate from the owner’s personal return.

Common Mistakes Business Owners Make

After working with business owners for years, these are the mistakes we see most often:

• Taking zero salary from an S corp. Some owners set up an S corp specifically for the payroll tax savings, then take everything as distributions to maximize those savings. The IRS views this as an audit trigger, and getting caught means owing back payroll taxes plus penalties. A reasonable salary is required. It just doesn’t have to be your entire income.
• Forgetting quarterly estimated taxes. Quarterly estimated taxes exist because the U.S. tax system is pay-as-you-go. If you’re a sole proprietor or partner, no one is withholding taxes from your draws. Missing quarterly estimates results in underpayment penalties — even if you pay everything owed by April.
• Mixing personal and business finances. Running personal expenses through the business (or business expenses through personal accounts) creates bookkeeping nightmares and can undermine the liability protection your business structure provides. Keep accounts separate from day one.
• Not having a consistent payment method. When you first start a business, you may not have enough left over to pay yourself consistently. That’s understandable. But many owners go months, or years, without ever formalizing how they pay themselves, which creates messy books and tax complications later.
• Choosing the wrong structure for your income level. The right structure for a business earning $50,000 may not be the right structure at $300,000. Electing S corp status too early (before the payroll tax savings outweigh the administrative costs) or too late both have real costs.

Frequently Asked Questions

Can I pay myself a salary from my LLC?

It depends on how the LLC is taxed. If your LLC is taxed as a sole proprietorship or partnership, you cannot pay yourself a W-2 salary. You take draws or distributions instead. If your LLC has elected S corp or C corp tax status, then yes, you can (and in the case of S corps, generally must) pay yourself a salary through payroll.

Do I pay taxes on money I leave in the business?

For most small businesses, yes. Sole proprietors, partners, and S corp owners are all taxed on their share of business profits regardless of whether they take the money out. The exception is C corporations, where the business pays tax at the corporate level and shareholders only pay personal tax when profits are distributed.

What counts as a reasonable salary for an S corporation owner?

There’s no single number — the IRS looks at the total picture. Relevant factors include what you actually do in the business, how many hours you put in, what someone else would earn doing the same job, and your industry. A good rule of thumb: if the IRS wouldn’t believe a third party would work for that salary, it’s probably too low. This is one of the most common areas where a CPA can save you from an expensive mistake.

When should I consider switching my business structure?

The conversation usually starts when a sole proprietor or LLC owner’s net profit consistently exceeds around $40,000–$50,000. At that point, electing S corp status may generate payroll tax savings that outweigh the added administrative cost. Every situation is different — income level, how much you work in the business, and state tax rules all factor in.

Not Sure What’s Right for Your Business?

How you pay yourself is one of the decisions that’s easiest to get wrong and hardest to fix retroactively. If you’re not confident your current setup is correct (or you’ve never really formalized it), it’s worth a conversation with a CPA.

At Compton & Company CPAs, we work with small business owners across Mississippi, Tennessee, and Alabama to get these details right. We’d rather help you get this right now than help you fix it after the IRS gets involved.