Business Basics: How to Pay Yourself as A Business Owner

When you’re starting your own company, how to pay yourself from your business is among the first questions you’ll ask. It’s a decision that can greatly impact not only your business, but also your personal finances.

Determine whether to take a draw or pay yourself a salary.

Depending on your company’s structure, there are two specific ways to pay yourself as a business owner. You may choose to withdraw compensation from your business account or pay yourself a salary.

• Withdraw money from your business bank account.
  Sole proprietors, business partners and members of limited liability companies (LLCs), taxed by default as sole proprietors or partnerships, don't receive traditional paychecks.  Instead, they can “take a draw” from the company bank account to pay themselves.
  
  Draws are permissible for non-business expenses only, such as compensation, personal outlays and cash flow management, and aren’t deductible. In this scenario, the business owner reports and pays taxes for company profits on the individual income tax return, including the draw. Personal draws don’t affect the tax rate.
  
  To take a draw, you may write a check to yourself or transfer money from your business account to your personal account. You may also withdraw cash from an ATM or from a teller at a bank’s physical location to pay yourself from your business. Be sure to keep relevant documents for these transactions.
  
  Draws reduce the owner's share of equity in the company. In other words, taking a draw reduces asset value on the company balance sheet. So, if you pay yourself $5,000 as a monthly salary, you are reducing your equity in the company by the same amount. Remember, you’ll also have to pay estimated self-employment taxes on the profits yourself rather than automatic withholding.
  
  If you are a sole proprietor or member of an LLC and decide to take a draw to pay yourself from your business, set a fixed monthly amount that's enough to cover your living expenses and taxes, and add a modest quarterly profit share. If you’re a partner with daily responsibilities within the company, establish compensation based on your duties. Also consider taking a distribution or dividend from additional profits if available.
  
  
• Pay yourself a salary.
  Owners and officers of S corporations and C corporations, as well as members of LLCs taxed as a corporation, who work for the company are considered employees of the corporation. They receive a regular paycheck with income and payroll taxes withheld.
  
  When deciding how much to pay yourself from your business in the form of a salary, the key is determining reasonable compensation.1 Reasonable compensation is the market‑rate salary that similar companies in your location would pay someone with your experience for the services you perform. Benchmark owner-operator salaries against third‑party data like industry surveys or Bureau of Labor Statistics ranges. Document your method, since the IRS can challenge whether a salary is reasonable.

How to pay yourself from your business depends on your company’s structure, financial goals and tax obligations. Choosing between taking a draw or paying yourself a salary as a business owner depends on your company’s structure, financial goals and tax obligations. Be sure you understand these payment methods, document your compensation and comply with IRS regulations.

Ask “how much should I pay myself from my business?”

As a business owner, the decision of how much to pay yourself depends on three factors. First, you must consider business revenue. Then, you must decide how much of that revenue you need to pay personal living expenses, as well as how much to reinvest in your business.

Overall, small businesses are doing well — 65.3% were profitable and 9% brought in revenue over $1 million last year.2 Since size is a factor, solo entrepreneurs typically earned less revenue than other small businesses. However, years of experience also matters and can increase the likelihood of higher revenue among this group. Small businesses with 10-19 employees earned the highest average revenue last year at $2.16 million.3

How do small business owners pay themselves? Eighty-six percent of U.S. small business owners pay themselves under $100,000 annually, but the majority earn $69,119 per year.4

Thirty percent of small business owners in the U.S. don’t take a salary, choosing to reinvest in their businesses instead.5 Returning earnings to your business supports long-term expansion, boosts future earnings, raises the overall value of the company and strengthens market share.