Ask ten small business owners how they pay themselves and you’ll get ten different answers. Some transfer money to their personal account whenever they need it. Some pay themselves a set amount every two weeks like a regular paycheck. Some — especially in the early days — don’t pay themselves at all and just use what’s left over after the bills are paid.
Here’s the truth: how you pay yourself matters a lot more than most business owners realize. Done wrong, it creates bookkeeping chaos, unexpected tax bills, and cash flow problems. Done right, it gives you personal financial stability, cleaner business finances, and potentially significant tax savings.
This guide walks you through exactly how to pay yourself depending on your business structure — and how to set it up in a way that keeps your books clean and your accountant happy.
Why You Can’t Just “Take What You Need”
In the early stages of running a business, it’s tempting to treat your business bank account like a personal ATM. Business doing well this week? Transfer some money over. Need to cover a personal expense? Put it on the business card and sort it out later.
This approach feels simple in the moment but creates serious problems over time.
First, it makes your bookkeeping nearly impossible to manage accurately. When random transfers and personal expenses are mixed into your business account, your financial reports stop reflecting reality. You can’t trust your cash flow numbers, your profit looks different than it actually is, and come tax time, your accountant has to spend hours sorting through the mess — hours you’re paying for.
Second, it creates unpredictability for you personally. If you’re taking money out only when you feel like it or when there’s something left over, your personal finances suffer. You can’t budget properly. You can’t plan for big personal expenses. And in slower months, you might go weeks without paying yourself at all.
Third — and this is the one most people don’t think about — taking money out of your business the wrong way can trigger unexpected tax bills. Depending on your business structure, how you pull money out has direct tax implications that can cost you thousands if you’re not doing it correctly.
The good news: there’s a right way to do this, and it’s not complicated.
Step One: Know Your Business Structure
How you should pay yourself depends entirely on how your business is legally structured. This is the starting point for everything else.
Sole Proprietor or Single-Member LLC
If you’re a sole proprietor or a single-member LLC that hasn’t elected to be taxed as an S-Corp, you and your business are essentially the same entity in the eyes of the IRS. You don’t receive a traditional paycheck. Instead, you take what’s called an owner’s draw — a transfer of money from your business account to your personal account.
Owner’s draws are not a business expense. They don’t reduce your taxable income. Your entire net profit is subject to self-employment tax (currently 15.3% on the first $168,600 of net earnings as of 2024), regardless of how much you actually draw out.
This is an important distinction: even if you leave all the profit in your business and don’t pay yourself a dime, you still owe self-employment taxes on the net profit. Many new business owners discover this the hard way when their first tax bill arrives.
Partnership or Multi-Member LLC
Partners and members of multi-member LLCs also take owner’s draws rather than salaries. Each partner’s share of the profit is determined by the partnership agreement, and each partner is responsible for self-employment taxes on their share of profits — again, whether or not they actually withdraw the money.
If you’re in a partnership, having a clear, written partnership agreement that spells out how profits are split and how draws are handled is essential. Vague arrangements lead to disputes and bookkeeping nightmares.
S-Corporation
If your business has elected S-Corp tax status — which is an option for both LLCs and corporations that meet certain requirements — the rules change significantly, and so do the tax advantages.
As an S-Corp owner who works in the business, you are required by the IRS to pay yourself a reasonable salary through payroll. This means setting up payroll, withholding income taxes and payroll taxes, and issuing yourself a W-2 at the end of the year — just like any other employee.
After paying yourself a reasonable salary, any remaining profit can be distributed to you as an owner’s distribution. Here’s the tax advantage: those distributions are not subject to self-employment tax (15.3%), only income tax. For owners who are earning well above the cost of setting up and running payroll, the S-Corp structure can save thousands of dollars in taxes every year.
This is one of the most powerful tax strategies available to small business owners — and one of the most underused. If you’re netting more than $40,000 to $50,000 a year from your business, it’s worth talking to your accountant or bookkeeper about whether an S-Corp election makes sense for you.
C-Corporation
C-Corp owners who work in the business pay themselves a salary just like employees, with full payroll taxes withheld. Unlike S-Corps, distributions from a C-Corp (dividends) are taxed at both the corporate level and the individual level — the so-called “double taxation” problem. Most small business owners avoid the C-Corp structure for this reason unless they have specific reasons to choose it.
How to Set Up Owner’s Draws the Right Way
If you’re a sole proprietor, single-member LLC, or partner, here’s how to handle draws cleanly.
Set a Regular Schedule
Instead of pulling money out whenever you feel like it, set a consistent draw schedule — weekly, biweekly, or monthly. Treat it like a paycheck. This does two things: it gives your personal finances predictability, and it makes your business cash flow much easier to manage and forecast.
Transfer a Set Amount
Decide on a draw amount based on what your business can realistically support — not what you want personally. A good starting point is to look at your average monthly net profit over the last 3 to 6 months and draw a percentage of that, leaving enough in the business to cover upcoming expenses and build a cash reserve.
Record Every Draw Correctly in QuickBooks
In QuickBooks, owner’s draws should be recorded under an equity account — not as an expense. This is one of the most common bookkeeping mistakes we see. When draws are recorded as expenses, they artificially inflate your costs, reduce your reported profit, and distort your financial picture.
The correct way to record it: create an Owner’s Draw equity account (if it doesn’t already exist), and record each draw as a transfer from your business checking to that account. Your bookkeeper can set this up for you and make sure every draw is recorded properly going forward.
Set Aside Money for Taxes
Because self-employment taxes aren’t automatically withheld from owner’s draws the way they are from paychecks, you’re responsible for paying them yourself — quarterly, as estimated tax payments. A common rule of thumb is to set aside 25-30% of your net profit for taxes. Keep that money in a separate savings account so it’s there when the quarterly deadline arrives.
Missing estimated tax payments can result in penalties and a very unpleasant surprise when your annual return is filed. This is one of the most common tax mistakes sole proprietors and LLC owners make.
How to Set Up Payroll for S-Corp Owners
If your business has elected S-Corp status, running payroll for yourself is a requirement — not optional. The IRS has cracked down heavily on S-Corp owners who take only distributions and skip the salary requirement, treating it as tax evasion.
Here’s what you need to do:
Determine a reasonable salary. The IRS requires that your salary be “reasonable” for the work you perform — meaning comparable to what you’d pay someone else to do your job. You can research industry salary data or work with your accountant to determine the right number. Paying yourself $20,000 a year when your business nets $300,000 is a red flag that invites IRS scrutiny.
Set up payroll. QuickBooks Payroll makes this relatively straightforward. You’ll set up your payroll schedule, your withholding amounts, and your payment method. QuickBooks will calculate your federal and state tax withholdings, generate your pay stubs, and file your payroll tax reports.
Run payroll consistently. Just like with owner’s draws, consistency matters. Run payroll on a set schedule — biweekly is common — and don’t skip pay periods.
Take distributions separately. Any additional money you pull out of the business above your salary should be recorded as owner’s distributions — not salary, not expenses. Your bookkeeper can make sure these are recorded correctly so your books stay clean.
How Much Should You Pay Yourself?
This is the question every business owner eventually asks, and the honest answer is: it depends.
It depends on your business structure, your net profit, your personal expenses, your tax situation, and how much cash your business needs to retain for operations and growth.
A few guidelines that work well for most small business owners:
Don’t pay yourself more than your business can sustain. Your draw or salary should come from profit, not from depleting your business reserves. If paying yourself your target amount would leave your business unable to cover its bills, it’s too much — for now.
Pay yourself enough to cover your personal needs. Consistently underpaying yourself creates personal financial stress that bleeds into your business decisions. If you’re constantly worried about personal bills, it affects how you run your business. Pay yourself enough to live comfortably, even if it’s not everything you eventually want to earn.
Increase your pay as your business grows. Your compensation should grow with your business. Set a policy — for example, every time your quarterly profit exceeds a certain threshold, you increase your draw or salary by a set amount. This gives you a clear path to increasing personal income without putting the business at risk.
Work with a bookkeeper and accountant to find the right number. This is genuinely one of the areas where professional guidance pays for itself. The right pay structure — especially if an S-Corp election makes sense for you — can save you far more than it costs.
The Bottom Line
Paying yourself isn’t just a personal finance decision — it’s a business finance decision with real tax implications, real cash flow consequences, and real bookkeeping requirements. Getting it right from the start saves you from headaches, unexpected tax bills, and the kind of messy books that make growing your business harder than it needs to be.
Whether you’re just starting to think about this or you’ve been doing it the informal way for years and want to clean it up, we can help.
Ready to Get This Right?
At Thank Heavens Bookkeeping, we help small business owners in Hanover, PA and across the country set up their bookkeeping the right way — including making sure owner’s draws, payroll, and distributions are recorded correctly so your books stay clean and your tax bill stays as low as legally possible.
Call us at (717) 965-0680 or visit thankheavensbookkeeping.com/contact to schedule your free consultation.
Your hard work built this business. Make sure you’re getting paid for it — the right way.
Thank Heavens Bookkeeping provides bookkeeping, payroll, accounts receivable, accounts payable, and cleanup services for small businesses in Hanover, PA, York, PA, Lancaster, PA, Harrisburg, PA, and remotely across the United States.
