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If you own a business, how do you pay yourself? Paying yourself is an essential task that can be confusing at times. You may wonder how to determine your compensation, especially if you're just starting your business. The good news is that paying yourself as a business owner is a straightforward process that you can easily master with a little help from our experts.
It's essential to understand the different payment options available to you. Depending on your business structure, you can pay yourself a salary, take draws from your profits, or both. However, choosing the most tax-efficient payment method can be challenging. In the following guide, we'll provide guidance on how to pay yourself as a business owner in the most tax-efficient way. Keep reading to ensure you're getting paid what you deserve while maximizing your tax benefits.
Ways to pay yourself as a business owner
You can pay yourself in two ways: by salary or owner's draw.
With a salary, you would set your wage and get paid that amount each pay period. You deduct taxes upfront, which is a more stable choice since it’s recurring and predictable.
In an owner’s draw, you transfer funds from the business to your personal account during regular internals or only when needed. It gives greater flexibility than a salary by allowing you to pay yourself more during profitable periods and to take a lesser draw as necessary during slower periods.
Your business’s classification plays a major factor in which method is used.
Owner’s Draw vs. Salary
There are pros and cons to embracing a salary or owner's draw. Use this handy comparison to establish which is best for your situation.
| Salary | Owner's draw |
| Pros: 1. Guaranteed Income: A set salary guarantees owners an income regardless of the business’s financial performance. 2. Retirement Contributions: Owners can contribute to a retirement plan, such as a 401(k), based on their salary. 3. Unemployment Benefits: Owners are eligible for unemployment benefits if the business fails. |
Pros: 1. Flexibility: Owners can draw as much or as little as they need without the constraints of a set salary. 2. Lower Taxes: Owner's draws are typically not subject to Social Security, Medicare, or unemployment taxes. 3. Simplicity: Owner's draws are a simple way to pay yourself without setting up a payroll system or calculating taxes. |
| Cons: 1. Fixed Costs: Owners are committed to paying themselves a set salary, which can be a fixed cost for the business. 2. Higher Taxes: Owners must pay Social Security, Medicare, and unemployment taxes on their salaries. 3. Complexity Owners must set up a payroll system and calculate taxes, which can be complex and time-consuming. |
Cons: 1. No Guaranteed Income: Owners rely on the business’s financial performance for their personal income, which can be uncertain. 2. No Retirement Contributions: Owner's draws do not qualify for contributions to a retirement plan, such as a 401(k). 3. No Unemployment Benefits: Owners are not eligible for unemployment benefits if the business fails. |
How to Pay Yourself as an S Corp or C Corp
If you form your business as an S corp or C corp, you should pay yourself a salary.
Typically, this is the equivalent of what professionals in your industry earn for comparable work.
Consider factors when determining your salary (and that of your stakeholders), including:
- Compensation agreements
- Dividend history
- Duties and responsibilities
- Payments to non-shareholder employees
- Time and effort devoted to the business
- Training and experience
- What comparable businesses pay for similar services
S corp owners can take draws on top of their regular salary. However, they cannot solely take draws in place of a salary.
Similarly, C corp owners pay themselves a salary comparable to their industry peers. They also have the option to pay themselves more on top of their regular salary in the form of a dividend payment.
C corps have double taxation, meaning the corporation pays a federal tax on its earnings. Then, the individual shareholders are taxed at an individual rate on their personal tax returns.
How to Pay Yourself as a Sole Proprietorship, LLC, or Partnership
Sole proprietors, LLCs, and partnerships typically use the owner’s draw method. For sole proprietors and partnerships, equity balance increases with capital contributions and business profits, and it reduces when the business experiences a loss or the owner/partner takes their draw.
How an LLC owner opts to be paid depends on whether the LLC functions as a sole proprietorship, partnership, or corporation. For a single-member (sole proprietor) LLC, the owner and the business are viewed as a single entity, and the LLC’s profits are classified as personal income, not business income. For multi-member (partnership) LLCs, profits are reported to the IRS, but the business itself isn’t taxed, and each member’s profits are considered personal income. If an LLC opts to be treated as an S corp or C corp for taxes purposes, they will follow the salary method.
How much should I pay myself as a business owner?
Several factors decide the amount you should pay yourself as a business owner. It depends on how your business is structured and other considerations, such as your state and industry. Research comparable salaries, browse guides, and speak to a tax professional for more advanced assistance.
Frequently Asked Questions
What is the most tax-efficient way to pay yourself?
The most tax-efficient way to pay yourself as a business owner depends on several factors, including the entity type you're formed as.
Can I pay myself as a non-profit business owner?
Non-profit business owners are allowed to receive a salary for their services.
What is the average salary for a small business owner?
The average salary of a small business owner differs by industry and state, among other considerations.
What is the best way to pay yourself as a business owner?
The best way to pay yourself as a small business owner is determined by several factors, including your entity type.
Do I pay taxes on an owner's draw?
You will pay taxes whether you take a salary or owner's draw. If you take an owner's draw, you will pay federal and state income taxes in addition to self-employment taxes.
How a Payroll Service Can Save You Time and Money
Whether you take a salary or owner's draw, utilizing 1-800Accountant's professional payroll service to pay yourself and your employees will save you a lot of hassle. Working with America's leading virtual accounting firm ensures you'll remain compliant and frees you to focus on what's important: growing your business. All it takes is a fast and free tax consultation – usually 30 minutes or less – to 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.