How to Pay Yourself as a Sole Proprietor: A Guide

While there are many advantages to operating as a sole proprietor, which is an unincorporated business, this entity type also presents its own set of challenges. Chief among them: how to efficiently pay yourself.

Paying yourself is more complex than receiving a traditional paycheck from an employer, as it involves unique rules, tax obligations, and strategic decisions that impact future growth. 

It's essential that you master these rules to help avoid costly surprises and keep your personal and business finances on solid ground. Use this excellent guide to paying yourself as a sole proprietor to learn how

Key highlights

  • An owner’s draw is money taken from a business's profits, and it is not considered a salary.

  • Always transfer pay from a business account to a personal account and label it as an owner’s draw.

  • You pay self-employment tax of 15.3% on profit up to $176,100 for 2025, up from$168,600 in 2024. 

  • Once your yearly profit exceeds $40,000, you may reduce taxes by opting for S corporation status, which adds payroll tasks.

  • Accountants and affordable, full-service bookkeeping can manage draw entries, tax estimates, and deadlines.

  • Review your pay strategy, tax set-asides, and business structure every quarter as revenue grows.

What is an Owner’s Draw?

An owner’s draw is simply money you take out of the business for personal use. Because a sole proprietorship is not a separate legal entity, the draw is not a business expense, and no tax is withheld at the moment of transfer. The IRS still expects its share, but this calculation is made on your personal income tax return using Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), which you will file by the April 15 deadline.

It's essential to transfer funds from a dedicated business account to a personal account to maintain clear records. Combining the two creates messy records and increases audit risk. 

Why You Can’t Pay Yourself a Salary

Traditional employees receive W-2 wages because they work for a separate employer. As a sole proprietor, you are the business, so you cannot issue yourself a traditional paycheck or withhold payroll taxes.

While sole proprietors are barred from collecting a traditional paycheck, they have something traditional employees lack: flexibility. As a sole proprietor, you can take draws whenever cash is available, but you need to exercise discipline. Every draw reduces working capital, and you will still owe income tax and self-employment tax later. Understanding that legal distinction prevents costly bookkeeping errors and helps you plan for a pro-growth strategy.

Calculating and Staying Compliant with Self-Employment Tax and Quarterly Estimated Tax Payments

Calculating self-employment tax

Most taxpayers contribute to Social Security and Medicare programs. Traditional employees contribute 7.76% of their taxable income to Social Security and Medicare taxes, with their employers matching that contribution. This is different for self-employed individuals.

Sole proprietors pay both halves, currently 15.3% on the first $176,100 of net earnings for 2025, up from $168,600 in the previous tax year. Only your net profit matters—draws do not impact this calculation. While deductions and credits are limited for traditional employees, self-employed individuals have numerous opportunities to reduce their tax liability, including deducting half of their self-employment tax contributions.

Calculating and paying quarterly estimated taxes

Because draws have no withholding, you must prepay income tax and self-employment tax each quarter using IRS Form 1040-ES, Estimated Tax for Individuals.

The challenge is accurately forecasting profit months before the end of the year, especially for seasonal businesses and other operations with inconsistent business income. Calculations that underestimate your contributions or those submitted after the deadline can trigger penalties or increased scrutiny by the IRS. Because of this, many small business owners and entrepreneurs set aside 25–30 percent of net income, then refine the number as financial reports come in throughout the year. 

Quarterly estimated tax deadlines: 

  • April 15

  • June 15

  • September 15

  • January 15

Delegating this responsibility to the specialists powering 1-800Accountant’s tax-deductible quarterly estimated tax service provides peace of mind and the freedom to focus on other aspects of your sole proprietorship.

Determining Your Paycheck: How Much Should You Take?

There are two prevailing paycheck strategies: 

  • The bare minimum approach to fuel reinvestment.

  • The market rate approach for personal financial predictability.

Both approaches work when they start with clear, precise numbers:

  1. Net profit trend – Is your business consistently in the black?

  2. Cash-flow buffer – Will the account still meet next month’s expenses after a draw?

  3. Tax reserve – Have you set aside funds for quarterly payments?

  4. Personal budget – What do you need to live without relying on credit?

Relying solely on a bank balance is risky; timing differences can obscure true profitability. Up-to-date profit & loss statements and other materials generated by 1-800Accountant's affordable, full-service bookkeeping solution reveal precisely what your business can afford so you can schedule steady draws or quarterly “profit bonuses” with confidence.

Step-by-Step Guide to Paying Yourself Correctly as a Sole Proprietor

Step 1: Absolute separation of finances

It's critically important to maintain a separate business bank account for your sole proprietorship. Here's what to do if you haven't taken that step to separate business and personal finances yet.

Open a business checking account and route all revenue through it. Pay business bills from that account, and make sure you never swipe the business debit card for personal items. Clear separation of your accounts has many benefits, including: 

  • Simplifying bookkeeping tasks.

  • Supporting loan applications.

  • Illustrating that you respect the line between yourself and your business venture.

Step 2: Establish a system for draws and record-keeping

Owner's draws and record-keeping are closely tied together. Consider these steps as you establish a system for your business. 

  1. Verify funds – Review cash flow and confirm the account can support a draw.

  2. Transfer electronically – Move money to your personal account via ACH or check.

  3. Record the draw – Categorize the transaction as “Owner’s Draw” in your accounting software.

  4. Track taxes – Update your quarterly estimate worksheet to ensure the next payment is accurate and up-to-date.

If you would rather focus on customers than categorizing transactions, 1-800Accountant's dedicated bookkeepers can tag each draw and keep your records Schedule C-ready, providing a clean audit trail.

Optimizing Your Pay by Changing Your Business Structure

A sole proprietorship is the simplest structure, yet it may not stay the most tax-efficient forever. Reaching higher profit levels means higher self-employment tax, and that is where restructuring as an S corporation can positively impact your operations.

When to consider an S Corporation election

Once your sole proprietorship's net business profit exceeds $40,000–$50,000 annually, the savings from switching to another business entity (other entities include a limited liability company, single-member LLC, and C corp) often outweigh the extra administrative costs. In an S corp, you split your pay between a reasonable salary, also known as reasonable compensation, which is subject to payroll tax, and a distribution, which is not subject to self-employment tax.

In business, timing and expertise matter. Efficiently transition from a sole proprietorship to an S corporation with 1-800Accountant's affordable tax advisory and entity formation services.  

Navigating the complexity of an S Corp

While there are numerous benefits of operating your business as an S corporation, it typically comes with an increased administrative burden, including: 

  • Running formal payroll.

  • Submitting fees to the state.

  • Meeting stricter compliance requirements.

The decision to restructure is a pivotal moment in your career, where expert guidance is crucial to weigh the pros and cons. 1-800Accountant’s affordable, year-round tax advisory service models various scenarios, while our entity formation experts file the election and register your new entity, ensuring compliance from day one.

Partner with 1-800Accountant for Financial Clarity and Growth

As this article illustrates, paying yourself as a sole proprietor is not a one-time checklist item, but a foundational business skill that you should master. Managing your pay is a financial strategy that evolves with your business. The complexities of draws, quarterly estimated taxes, and entity structuring may be viewed as obstacles by some, but are, in reality, manageable challenges and opportunities with the right support from the experts at 1-800Accountant, America's leading virtual accounting firm.

When you trust our expert bookkeepers with your complex financial work, they seamlessly address bookkeeping tasks, ensuring compliance and peace of mind. In addition to affordable, full-service bookkeeping, our CPAs with more than 17 years of experience on average, and tax professionals will advise you with our year-round tax advisory services, to help you make strategic business decisions, such as when to transition to an S corp. 

Schedule a quick consultation today – typically 30 minutes or less— to learn more and get started. 

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.