How business owners pay themselves depends almost entirely on how the business is set up for tax purposes. Sole proprietors, partners, and LLC members take owner draws from business profits. Owners of S-corporations and C-corporations who work in the business must put themselves on payroll and receive a W-2 salary, and many pair that salary with profit distributions to balance their tax bill against take-home pay.1Internal Revenue Service. Paying Yourself
Match the Pay Method to the Entity
The IRS ties your compensation method to your tax classification. Sole proprietors and single-member LLC owners are not treated as separate from their business. All net business income flows to your personal return, and you access profits through owner draws rather than a paycheck.2Internal Revenue Service. Publication 3402, Taxation of Limited Liability Companies
Multi-member LLCs are generally taxed as partnerships. Each member reports their share of income on a Schedule K-1 and takes draws or guaranteed payments, not W-2 wages.3Internal Revenue Service. Topic No. 407, Business Income
S-corporation and C-corporation owners who actively work in the business must be classified as employees. Their wages are subject to payroll tax withholding. Courts have consistently held that corporate officers who provide more than minor services must be treated as employees, even if the owner would rather take everything as distributions.4Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers
Paying Yourself With Owner Draws
An owner draw is a withdrawal of business profits. It reduces the company’s equity rather than creating a wage expense. Sole proprietors, partners, and LLC members typically pay themselves this way. Nothing is withheld when you take the money. The draw is simply a transfer from the business to you.
Self-Employment Tax on Your Earnings
Even though no tax comes out of a draw, you still owe self-employment tax on your net business earnings. The rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The Social Security portion applies only to the first $184,500 of combined wages and self-employment income in 2026.6Social Security Administration. Contribution and Benefit Base The Medicare portion has no cap. If your self-employment income tops $200,000 ($250,000 married filing jointly), you owe an additional 0.9% Medicare tax on the excess.7Internal Revenue Service. Topic No. 560, Additional Medicare Tax
You can deduct half of your self-employment tax when calculating adjusted gross income, which softens the hit of paying both the employer and employee shares yourself.8Internal Revenue Service. Topic No. 554, Self-Employment Tax
Quarterly Estimated Payments
Because nothing is withheld from draws, you make quarterly estimated payments to cover income tax and self-employment tax. The IRS uses four periods with these deadlines:9Internal Revenue Service. Estimated Tax
- January 1 through March 31: payment due April 15
- April 1 through May 31: payment due June 15
- June 1 through August 31: payment due September 15
- September 1 through December 31: payment due January 15 of the following year
Estimated payments are generally required if you expect to owe at least $1,000 in tax after withholding and refundable credits. To avoid an underpayment penalty, pay at least 90% of your current-year liability or 100% of what you owed last year. The threshold rises to 110% if your prior-year adjusted gross income exceeded $150,000.9Internal Revenue Service. Estimated Tax
Guaranteed Payments for Partners
Partners in a partnership, and members of a multi-member LLC taxed as a partnership, can receive guaranteed payments. These are fixed amounts paid for services or the use of capital, paid whether or not the business is profitable. The tax code treats them as if they were made to someone outside the partnership for purposes of reporting income and deducting business expenses.10Office of the Law Revision Counsel. 26 U.S. Code 707 – Transactions Between Partner and Partnership
Guaranteed payments are subject to self-employment tax for general partners. For limited partners, only guaranteed payments received for services count toward self-employment income; payments for the use of capital do not.11Internal Revenue Service. Calculation of Plan Compensation for Partnerships Partners do not receive a W-2 for these payments or for distributions. Partnership income is reported on Schedule K-1.1Internal Revenue Service. Paying Yourself
Paying Yourself a Salary Through Payroll
Corporate officers who provide services must receive a salary, and the corporation must withhold federal income tax along with the employee’s share of Social Security and Medicare.12Internal Revenue Service. Tax Withholding The corporation then matches those FICA contributions, splitting the 15.3% obligation between you and the business.
Corporations paying wages also owe Federal Unemployment Tax (FUTA). The effective FUTA rate is typically 0.6% on the first $7,000 of wages per employee, after applying the standard 5.4% credit for paying state unemployment taxes.13Internal Revenue Service. Publication 15-A, Employer’s Supplemental Tax Guide Employers in states with outstanding federal unemployment loan balances may face a reduced credit and a higher effective rate.
Reasonable Compensation for S-Corp Owners
S-corporation owners have a specific requirement: your salary must reflect reasonable compensation for the work you do. Revenue Ruling 74-44 established that the IRS can reclassify distributions as wages when a shareholder-employee takes little or no salary to avoid payroll taxes.4Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers The IRS weighs several factors when judging whether a salary is reasonable:14Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
- Your training, experience, and professional qualifications
- The duties and responsibilities you actually carry out
- The time and effort you put into the business
- What comparable businesses pay for similar services
- The company’s history of paying dividends or distributions
- Any formal compensation agreements in place
Taking Profit Distributions on Top of Salary
After paying yourself a reasonable salary, corporate owners can take additional income through profit distributions. These are based on ownership percentage, not work performed, and the tax treatment depends on the entity type.
S-Corporation Distributions
S-corporation distributions are generally not subject to self-employment or payroll taxes. They are tax-free up to your stock basis, which is roughly what you have invested in the company plus accumulated profits, minus prior distributions and losses.15Internal Revenue Service. S Corporation Stock and Debt Basis
Basis rises when the business earns income and falls when it distributes cash, passes through losses, or incurs non-deductible expenses.16Office of the Law Revision Counsel. 26 U.S. Code 1367 – Adjustments to Basis of Stock of Shareholders, Etc. A distribution that exceeds your stock basis is taxed as a capital gain, and as a long-term capital gain if you have held the stock more than a year.15Internal Revenue Service. S Corporation Stock and Debt Basis Debt basis does not factor into whether a distribution is taxable.
C-Corporation Dividends
C-corporation profits face double taxation. The corporation pays corporate income tax on its earnings, and shareholders then pay individual income tax on the dividends distributed from those after-tax profits. This two-layer structure is a common reason small businesses choose pass-through entities instead.
Records and Filings for Each Method
Every dollar that moves between the business and your personal accounts should be categorized as a draw, distribution, or wage expense. Clean records protect you in an audit and preserve the legal separation between owner and business.
If You Take Draws
Record each draw in an “Owner’s Draw” equity account. Log the date, amount, and method whether you write a check or transfer electronically. At tax time, your net business earnings, not the total drawn, determine self-employment tax. Sole proprietors file Schedule C; partners report their share on Schedule K-1.
If You Run Payroll
Corporations paying wages file Form 941 quarterly to report total wages and taxes withheld. The return is due the last day of the month following each quarter: April 30, July 31, October 31, and January 31.17Internal Revenue Service. Instructions for Form 941
Employers also file Form 940 annually for federal unemployment tax. For the 2025 tax year, Form 940 is due February 2, 2026, or February 10 if you deposited all FUTA tax on time.18Internal Revenue Service. Instructions for Form 940 Many small businesses use a payroll service to handle withholding calculations and these filings.