How to Pay Yourself as an Owner

Learn the four methods to pay yourself from your business, from salary to distributions, with tax and cash flow considerations.

1. Match payment method to entity structure. S-corp owners must take reasonable salary before distributions. LLC members can take draws against equity or guaranteed payments. Sole proprietors take owner draws from net income. C-corp owners take salary, bonuses, or dividends (double-taxed).
2. Calculate reasonable salary for S-corps. IRS requires salary comparable to what you'd pay someone else for your role. Use Bureau of Labor Statistics data for your industry and location. Salary saves self-employment tax on distributions but costs payroll processing. Target 30-50% of net income as salary in most cases.
3. Set owner draw frequency and amounts. Base draws on rolling 13-week cash flow projections, not monthly profit. Leave 3-6 months operating expenses in the business account. Draw against expected annual profit, not last month's performance. Weekly or bi-weekly draws smooth personal cash flow better than monthly.
4. Track basis for distributions and draws. You can only distribute what you've contributed plus retained earnings. Track your basis: initial investment plus additional contributions plus retained profits minus prior distributions. Distributions exceeding basis become capital gains. Use a simple spreadsheet updated monthly.
5. Optimize for total tax burden. Compare total taxes: salary plus payroll taxes versus self-employment tax on draws. Factor state taxes — some states don't tax S-corp distributions. Run scenarios at different salary levels with your CPA. The lowest total rate wins, not the lowest income tax rate.
6. Document everything for compliance. Board resolutions for salary changes and distributions. Payroll records for W-2 wages. Draw schedules and basis tracking for equity distributions. Expense reports for reimbursements. Clean records prevent IRS challenges and support reasonable compensation arguments.