How to Pay Yourself as a Small Business Owner
September 21, 2020 | Last Updated on: July 12, 2023
September 21, 2020 | Last Updated on: July 12, 2023
Running a business is a lot of work—and as a small business owner, you need to get paid for your time, energy, and efforts.
But paying yourself as a small business owner isn’t as cut and dry as paying your employees. There are a few different options when it comes to how (and how much) you pay yourself, and it’s important to understand those different options—and how to determine which option is the best for you and your business.
Let’s take a look at the different ways to pay yourself as a small business owner—and how to determine which payment option is the right fit for your business.
How you structure your business will play a huge role in determining how to pay yourself—so before we jump into how to pay yourself as a business owner, let’s quickly review the different business entities.
There are a few different ways you can structure your business, including:
Because of the way different business structures are taxed, the business entity you choose will determine the right way to pay yourself as a business owner.
As mentioned, there are a few different ways small business owners can pay themselves, including:
When you take an owner’s draw, you’re taking money from your business (or “taking a draw”) for your own personal use. Sole proprietors and single member LLCs can all pay themselves using the owner’s draw model.
The major benefit of taking an owner’s draw? Flexibility. Paying yourself through the owner’s draw model offers a lot more flexibility than a salary. When you take an owner’s draw, you can take as much or as little as you’d like—and you can draw from your business account frequently, infrequently, on a regular basis, or more randomly; it’s really up to you, when you need money, and how much you need.
If you decide to go with this model, it’s important to note that the money you pay yourself through an owner’s draw isn’t taxed—so you’ll need to set aside money for self-employment taxes and estimated taxes on your own.
When you pay yourself a salary, you’re considered a W-2 employee—and just like other employees, you get paid a set amount on a regular schedule (for example, $7000 once per month or $3500 bi-weekly).
One of the major benefits to paying yourself a salary is that taxes (for example, Medicare, FICA taxes, payroll taxes, and social security) are automatically withheld—which gives you, as a business owner, one less thing to think about.
Distributions are cash payouts from a business to the owner. Owners of a partnership pay themselves through distributions—and owners of S corporations can take distributions in addition to their salary. Owners of C corporations can also receive cash payouts from their businesses, which are called dividends.
Similar to owner’s draw, distributions aren’t taxed—and, as a business owner, you’ll be responsible for paying those taxes on your own.
Things to consider when paying yourself as a small business owner
Now that you understand the different ways to pay yourself (and which payment structure aligns with which business entity), let’s cover a few things you’ll want to consider when paying yourself as a small business owner.