"How should I pay myself?" is one of the most common questions new business owners ask. The answer depends less on preference and more on how your business is set up for tax purposes. Here's how it works for each type.

Two ways to take money out

  • A draw is money you move from the business to yourself, whenever and in whatever amount makes sense. It isn't a paycheck, and nothing is withheld.
  • A salary is regular wages paid through payroll, which means the business withholds income tax, Social Security and Medicare, and reports it all on a Form W-2.

Which one you use is mostly decided by your business structure.

Sole proprietors and single-member LLCs: draws

Most small businesses are run by one person. In 2023, the U.S. had 30,427,808 nonemployer establishments (businesses with no paid employees), 78.4% of all business establishments (U.S. Census Bureau, 2026).

If you're a sole proprietor, you and the business are the same taxpayer. A single-member LLC (a limited liability company with one owner) is treated the same way for federal income tax unless it elects to be taxed as a corporation (IRS, 2026).

That means you can't put yourself on payroll. You take draws instead. The key point is that you're taxed on your profit, not on your draws. Your net earnings are figured on Schedule C (IRS, 2026), whether you took that money out or left it in the business account.

On top of income tax, you'll owe self-employment tax, the Social Security and Medicare that an employer and employee would normally split. The rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. It applies once your net earnings from self-employment reach $400. You can deduct the employer-equivalent half (IRS, 2026). The Social Security part stops at $184,500 of earnings in 2026 (Social Security Administration, 2025).

Because nothing is withheld from a draw, many owners set aside a share of every deposit for quarterly estimated tax payments.

Partnerships and multi-member LLCs: draws and guaranteed payments

An LLC with two or more owners is taxed as a partnership by default (IRS, 2026). Partners aren't employees and shouldn't get a W-2. They receive a Schedule K-1 for their distributions and any guaranteed payments (IRS, 2026).

A guaranteed payment is a set amount a partner gets for their work, figured without regard to the partnership's income (IRS Publication 541, 2025). Think of it as the closest thing to a salary a partner can have. As with sole proprietors, partners may owe tax on their share of partnership income "whether or not distributed" (IRS, 2025).

S corporations: a reasonable salary, then distributions

An S corporation is a corporation (or an LLC that elects S status) whose profits pass through to the owners' personal returns. This is where salary becomes required. If you work in your S corporation, you're generally an employee, and you should be paid wages through payroll "commensurate with your duties" (IRS, 2026). Profit beyond that can come out as distributions, which aren't subject to payroll taxes.

That difference tempts some owners to pay themselves a tiny salary and take the rest as distributions. The IRS has long warned against it. It points to factors like your training and experience, your duties, the time you put in, and what similar businesses pay for similar work (IRS, 2008). That fact sheet is now marked as historical on IRS.gov, but courts still rely on the same idea.

A real case shows how it plays out. In David E. Watson, P.C. v. United States, 668 F.3d 1008 (8th Cir. 2012), an Iowa accountant's S corporation paid him a $24,000 salary in each of 2002 and 2003. He took distributions of $203,651 and $175,470 in those years. The government's expert valued his services at $91,044 a year. The trial court treated that amount as wages subject to employment taxes, and the appeals court affirmed (U.S. Court of Appeals for the Eighth Circuit, 2012).

Say a plumber's S corporation earns $150,000 after expenses. A salary in line with what a working plumber in her area earns, with the rest as distributions, is a defensible setup. A $15,000 salary invites the kind of scrutiny Watson faced.

C corporations: salary and dividends

In a C corporation, the business pays its own income tax. Owners who work there are paid salaries, which the corporation can deduct when the pay is reasonable (26 U.S.C. §162). Profits paid out as dividends aren't deductible to the corporation and are taxed again on the owner's return. That's the "double tax" (IRS, 2026).

Picking what fits

  • Sole proprietor or single-member LLC: draws, plus estimated tax payments.
  • Partnership or multi-member LLC: draws and guaranteed payments, reported on a K-1.
  • S corporation: a reasonable salary through payroll, then distributions.
  • C corporation: salary through payroll, and dividends if you pay them.

If you're wondering whether your setup still fits how much you earn, reach out to Reflexivity. We can talk through what makes sense for you.

General information, not tax advice.