How to Pay Yourself as a Small Business Owner
As a business owner, you deserve to get paid for the countless hours you put into making sure your company succeeds — the question is, how much? As a starting point, many small business owners pay themselves between 20% and 50% of their business’s net profit, though the right amount depends on your business structure, cash flow and tax obligations.
3 Ways to pay yourself as a business owner
As a small business owner, you can pay yourself through an owner’s draw, salary or combination method.
- Owner’s draw: This allows business owners to pay themselves without issuing regular paychecks or withholding employment taxes. You can simply write a check to yourself from the business checking account or transfer money from your business account to your personal account on an as-needed basis.
- Salary: This payment goes through a payroll service and is usually made on a regular basis, such as weekly, bi-weekly or monthly. It’s usually a set amount but may be based on the number of hours worked or other factors. When you pay yourself a salary, you cut a paycheck and withhold the applicable income and employment taxes from your compensation.
- Combination method: This method involves having a portion of your income as a base salary while also taking regular or occasional draws as needed. It works well for business owners who want the predictability of a steady paycheck but also the flexibility to take more when profits allow.
Owner’s draw vs. salary: Pros and cons
| Best for | Pros | Cons | |
|---|---|---|---|
| Owner’s Draw | Sole proprietors, partnerships, single-member LLCs | Access to more funds. If profits are up, you can take a larger draw. More flexible. You can withdraw funds as needed rather than waiting for a scheduled paycheck. | Unpredictable income. You may not know how much money you can withdraw until profits come in each month. Tax responsibility falls on you. You’ll need to set aside money and make quarterly estimated payments for income and self-employment taxes. |
| Salary | S-corps, C-corps | More stable. You receive payments in regular intervals rather than as profits come in. Easier tax planning. Taxes are automatically deducted with each paycheck. | Less flexibility. You have to stick to a reasonable compensation schedule, even when your business’s revenue drops. Payroll complexity. Requires setting up payroll, withholding employment taxes and staying compliant with IRS reasonable salary rules. |
Beyond a salary or draw, business owners can also pay themselves through dividends or shareholder distributions — payments made out of the company’s profits after taxes. S-corp owners can take a salary plus dividends, while C-corp owners can take a salary plus distributions.
How much should you pay yourself?
According to Payscale, U.S. small business owners report an average annual salary of around $78,000 in 2026. Your take-home pay will depend on your business type, how long you’ve been operating and the company’s financial stability.
Many entrepreneurs don’t take a salary in the early stages of their company or until their business is turning a decent profit. However, paying yourself should be considered a regular operating expense — not just something that should happen once the business takes off. It’s important to consider how your salary will affect other areas of your personal budget, such as housing, retirement and paying your own bills.
The Internal Revenue Service (IRS) requires corporate shareholders and business owners to pay themselves a reasonable salary for their involvement in the company.
A reasonable business owner salary is what the business would pay an unrelated employee or independent contractor with a similar level of experience for providing the same services within that field.
- For example, if you run a dog walking business and pay independent contractors $20 an hour, it might raise a red flag if you pay yourself $500 an hour for the same services.
Paying yourself by business type
The type of business entity you choose impacts how you pay yourself. The business structures below allow you to have employees as long as you follow your state’s employment regulations and deduct the required taxes from their paycheck.
| Business entity | Definition | Payment method options | Tax form |
|---|---|---|---|
| Sole proprietorship | An unincorporated business with a single owner. | Draw | Schedule C (Form 1040) |
| Partnership | Two or more owners who contribute time, skills, money, property and more to keep the business running. | Draw | Form 1065 |
| Limited Liability Company (LLC) | A business that is separate from its owner(s), helping protect your personal assets and finances. LLCs can be single-member or elect to be taxed like partnerships, S-corps or C-corps. | Draw | |
| S-corp | A corporation that can have up to 100 shareholders; business owners are personally taxed on their shares instead of the company being taxed at the corporate level. This allows business owners to avoid double taxation. | Salary and dividends (draws are also allowed, but not in place of a reasonable salary) | Form 1120-S |
| C-corp | A corporation with unlimited shareholders that offers the strongest personal liability protection. The company pays taxes on profits; shareholders pay taxes again on dividends — resulting in double taxation. | Salary and distributions | Form 1120 |
Paying yourself with an owner’s draw
An owner’s draw gives you flexibility to take money from the business as needed, but it requires some planning to make sure you’re not overdrawing.
You need to calculate your business’s net profit before making any withdrawals to ensure you leave enough money in the account to cover operational expenses and taxes. As a general rule, you should save around 30% of your business income for taxes.
You can also withdraw a set percentage of your business’s profit with each draw, adjusting for seasonal fluctuations in revenue.
Paying yourself with a salary
To determine your salary, you need to first estimate your company’s annual gross revenue and subtract all operating costs, such as rent, employees’ salaries, inventory and supplies. Make sure to set aside extra to cover emergency expenses or business debt, such as payments for a small business loan.
From there, divide what’s remaining by your desired pay frequency and create a payment schedule using a payroll service or an accountant. Just remember you have to follow the IRS’s reasonable salary guidelines, keeping in line with what others would get paid in the same industry.
With the salary method, you don’t have to calculate extra tax payments or save for quarterly payments — the payroll service will do this automatically for you.
4 mistakes to avoid when paying yourself
1. Not keeping personal and business finances separate
It’s important to keep your personal and business finances separate, especially when tax season comes around. You need an accurate record of your qualified business deductions in order to claim them on your business tax return.
Some business structures, such as LLCs, require you to maintain the legal separation between you and your business.
To keep your business and personal finances separate, open a business checking account and dedicated business credit card to use only for business expenses. Try to avoid paying personal expenses out of your business account and vice versa.
2. Not planning for taxes
It’s essential to plan for taxes when deciding how to pay yourself.
If you pay yourself a salary, you can automatically withhold income and employment taxes from your paycheck. Using a payroll service or accountant can make this process straightforward.
But for those taking an owner’s draw, you may need to save up and make quarterly estimated payments toward income and self-employment taxes.
Work with an accountant or tax professional to figure out your business’s tax rate and how much you should be withholding from your paychecks or draws.
3. Not consistently paying yourself
Paying yourself consistently is essential, as it allows you to stay on top of your personal finances while running your business. Consider your own salary or draw as a regular operating expense — not just something that happens if and when you make a profit.
Falling behind on your personal expenses could negatively impact your business, especially since some lenders review your personal credit score along with your business credit report when approving loan applications.
Create a business budget to better understand your company’s cash flow and to help create a solid payment schedule for yourself.
4. Not accurately tracking expenses
Recording all business income and expenses will help you accurately track the available cash in your business checking account. This will help prevent potential financial mistakes or errors in accounting.
If you find yourself in a pinch, you can consider a business line of credit to help cover seasonal dips in income.
Invest in a business bookkeeping service to stay on top of your company’s cash flow and to avoid depleting your bank account.
Frequently asked questions
How you pay yourself will depend on how your business is structured and how involved in the tax process you want to be. An owner’s draw provides flexibility, but it lacks the stability of a salary. Whichever method you choose, you need to consider your current cash flow as well as projected expenses to ensure you don’t pay yourself too much.
There’s not a one-size-fits-all formula for calculating your take-home pay, though most small business owners pay themselves between 20% and 50% of their business’s net profit. You can calculate your owner’s draw or salary percentage rate based on your company’s overhead expenses and cash flow projections, as well as your business’s needs. For example, you might want to set aside extra earnings to cover an expansion or new equipment, therefore taking a little less in your own salary.
If you’re starting a business, you’ll also want to account for startup business expenses, such as registering your business, licenses and permits, insurance and more.
For S-corps and C-corps, your salary and the company’s portion of your FICA tax counts as qualified business deductions. Claiming these expenses can help reduce your company’s total tax bill.
Unfortunately, sole proprietors, partnerships and single-member LLCs can’t legally pay themselves with W-2s and, therefore, can’t claim any owner’s draws as a business expense. That said, you can claim payments made to other employees or independent contractors — either as W-2 salaries or 1099 payments.
Compare business loan offers