How Do You Pay Yourself When You Own a Business?

Your business is likely something you’re passionate about, but it’s also the way you’ve chosen to earn a living. If you’ve just gotten your business up and running, and it’s generating enough revenue for you to be able to have an income, you’re probably wondering, “How do I pay myself from my business?”

In addition to the question of whether there is actually enough money to generate an income, you also need to know the different tax considerations that apply to your business and the payment methods available to you. Both depend on the type of business structure you’ve chosen for your company.

How to pay yourself as a business owner

When determining the best method to use for making sure your business does what it was set up to do (help you earn a living), you’ll first need to decide what kind of business you have. It might make more sense for your company to be set up as an LLC, for example, rather than a sole proprietorship.

Then you’ll choose what is the most efficient way to pay yourself. Most business owners choose either a salary or an owner’s draw. Finally, you’ll need to choose a payment method, like an ACH money transfer.

Which business structure should you choose?

The main factor in determining how you pay yourself is the business entity you choose. If you’re running a sole proprietorship, for example, you’ll pay yourself differently than if your business is an S corporation. Every business owner will choose from the following options when they’re setting up their business.

Sole proprietorship

If you’re a sole proprietor, you’re the only owner of your business, and all the profits from your business are “passed through” the business to you. This means that instead of a regular paycheck, you simply deposit into your personal bank account whatever earnings from your business’ bank account that you would like, and you’ll pay tax when you file your personal income tax return.

Partnership

Here, there is more than one owner, so you’ll be sharing whatever profits the business makes with them. But, like a sole proprietorship, a partnership is a pass-through entity, and all the business’ profits will go to the owners. How you and your partner(s) split the profits is up to you and should be clearly laid out in your partnership agreement.

LLC

An LLC, or limited liability company is all about flexibility. LLCs with a single member are usually considered sole proprietorships by the IRS. Multiple-members LLCs are treated as partnerships, and the owners get paid through an owner’s draw. They can also choose to be taxed as an S corporation or C corporation, in which case, they would be paid as an employee of the company.

S corporation

The IRS considers owners of S corporations to be employees, compensated for their work with a wage or salary. This means they’ll receive a W-2 like an employee of any company. On top of this income, they can also receive a shareholder distribution, that is if the company is making a profit. The major benefit of this is that those distributions aren’t subject to self-employment tax like an owner’s draw in an LLC or sole proprietorship is.

C corporation

Like in an S corporation, the owners of a C corporation are considered employees, and they are paid as W-2 employees. But these owners can also hold shares in the company and be paid dividends, which become part of the owners’ taxable income.

How does a business owner get paid?

The two main ways to pay yourself when you’re the owner of a company are by giving yourself a salary or taking an owner’s draw from your company’s earnings.

Salary

You can pay yourself a regular salary in the same way you would pay an employee of your company. If your company is an S or C corporation, the IRS requires the company to pay owners as employees. For this, the IRS has a reasonable compensation requirement. Essentially, you need to look at what other comparable positions in your industry are being paid.

Owner’s draw

This is the cash you take out of your business’ profits whenever you want it. You’ll pay taxes on this money as personal income when you file your taxes.

Tools to help

Knowing what business structure to choose and which tax forms you need for your particular type of business can be challenging. FlyFin has a tool to help you choose wisely, as well as tax calculators to help you make sure to set aside enough of what you pay yourself so you’re ready at tax time