The Right Way to Pay Yourself as a Small Business Owner

A lot of business owners focus on how much money they make, but not how they pay themselves. That’s where problems usually start.

Paying yourself the wrong way can lead to higher taxes, cash flow issues, and even trouble if your structure isn’t set up correctly. The way you take money out of your business matters just as much as how much you earn. Here’s how to do it the right way.

It Depends on Your Business Structure

The way you pay yourself isn’t the same for every business. If you’re a sole proprietor or a single-member LLC, you don’t take a traditional paycheck. Instead, you take what’s called an owner’s draw. This is simply moving money from your business account to your personal account.

If you’re taxed as an S-corporation, it works differently. You’re required to pay yourself a salary through payroll, and you may also take additional profits as distributions. The Internal Revenue Service expects your method of payment to match your business structure. If it doesn’t, it can raise issues.

Understanding Owner’s Draws

For many small business owners, draws are the simplest way to get paid. You’re not taxed when you take the draw itself. Instead, you’re taxed on the profit your business makes, regardless of how much you actually take out.

This is where confusion happens. Some people think they only owe taxes on what they withdraw. That’s not how it works. Even if you leave money in the business, it can still be taxable.

S-Corporation Salary Rules

If your business is taxed as an S-corp, you can’t just take draws whenever you want. You must pay yourself a reasonable salary through payroll. This salary is subject to payroll taxes, just like any other job.

After that, you can take additional profits as distributions, which are not subject to self-employment tax. This is where potential tax savings come in. But if your salary is too low, it can raise red flags.

Don’t Ignore Taxes When Paying Yourself

One of the biggest mistakes business owners make is taking money out without setting anything aside for taxes.

Since taxes aren’t automatically withheld in many cases, it’s your responsibility to plan ahead. If you don’t, you could end up with a large tax bill and not enough cash to cover it. This is especially important for those taking draws or distributions.

Keep Business and Personal Finances Separate

Paying yourself correctly also means keeping your accounts clean. Your business should have its own bank account, and your personal spending should come from your personal account. When you pay yourself, it should be a clear transfer, not random spending from a business card. This helps with bookkeeping, taxes, and keeping your records organized.

Be Consistent With Your Payments

Instead of taking money randomly, it’s better to create a consistent system. Some business owners pay themselves weekly, others monthly. The exact schedule doesn’t matter as much as the consistency. This makes it easier to manage your finances and avoid overspending in the business.

Plan Around Your Business Cash Flow

Just because your business has money in the account doesn’t mean it’s all available to take. You still need to cover expenses, taxes, and future costs. Taking too much out too quickly can create cash flow problems.

A good approach is to understand your numbers before deciding how much to pay yourself.

How Local Tax Can Help

Paying yourself the right way isn’t always obvious, especially as your business grows.

At Local Tax, we help you understand the best way to pay yourself based on your structure. Whether it’s setting up payroll for an S-corp or helping you manage draws properly, we make sure everything is done correctly. This helps you avoid mistakes and keep more of what you earn.

Local Tax

9429 Somerset Blvd, Bellflower, CA 90706

(562) 925-2203

Final Thought

How you pay yourself as a business owner isn’t just a personal decision. It’s a tax decision. The right approach can help you stay organized, avoid problems, and potentially reduce what you owe. If you’re not sure you’re doing it correctly, it’s worth taking the time to get it right now instead of fixing it later.