If you run a company and you’re not sure how to pay yourself as a business owner, you’re not alone. According to OnPay’s 2025 small business survey, more than 90% of owners say increasing revenue is a high or medium priority, with many also focused on improving operations and growing their teams. With so much attention on moving the business forward, it’s easy for decisions about owner pay to take a back seat — even though the IRS has guidelines that can affect how (and how much) you pay yourself.
Fortunately, figuring out whether to pay yourself by owner’s draw or salary (while also staying in the good graces of the tax man) isn’t that difficult once you understand the basics.
Key takeaways about how to pay yourself from your business
- An owner’s draw lets you take discretionary amounts from your business with no fixed amount or schedule and no taxes withheld
- A salary is a fixed payment on a regular schedule, with taxes withheld and remitted to the IRS each pay period
- For sole proprietors and partners in a partnership, an owner’s draw is the only payment option
- The IRS taxes LLC owners as sole proprietors by default, but can elect S Corp or C Corp treatment
- S Corp and C Corp owners actively involved in the business must pay themselves a reasonable salary
And making the right call for your business can help you save on taxes, maximize cash flow, and stay on the right side of the IRS.
So let’s dive in.
Salary and owners’ draw simplified
There are two ways to pay yourself as a business owner. Here’s what each one means:
Salary: Paying yourself a salary means taking a fixed amount each pay period. The business withholds taxes from your paychecks and sends them to the IRS on your behalf, just like any other employee. A payroll provider can handle all of that withholding automatically, so tax time is uneventful. Taking a salary also makes it easier to anticipate your company’s cash needs and stay current on your personal tax obligations.
The IRS even requires owners of S Corps and C Corps who are involved in running the business to take a salary at a “reasonable” level of compensation. We’ll cover what that means by entity type below.
Owner’s draw: Also referred to as a “draw,” an owner’s draw is when you take money out of your business for personal use. If your company makes $100,000 in profit, that money is yours — you’re free to write yourself a check or transfer funds to your personal account. If you’re a sole proprietor, a draw is your only option for paying yourself.
Pro tip: How to make an owner’s draw
- Write yourself a check and deposit it into your personal account or transfer funds directly from your business account.
- Record the withdrawal in your business books as an owner’s draw, which reduces your business equity balance.
Draws aren’t limited to cash, either. For example, if your company buys computers at a bulk discount and gives one to your family, that transfer of value also counts as a draw or compensation.
You can take draws on a fixed schedule or whenever you need them — that’s your call as the owner. But because the company doesn’t withhold taxes, you’ll need to set aside enough to cover your tax bill and make quarterly estimated payments to the IRS.
There’s one more thing to keep in mind if you structured your business as an LLC. Commingling your business and personal finances can put your limited liability protection at risk. Keep those accounts separate.
Is it better to take a draw or salary?
The answer depends on your business structure and cash flow situation, as both methods have pros and cons.
An owner’s draw offers more flexibility. Instead of committing to a fixed amount, you can adjust what you take based on how well the business is doing or how much you personally need. The tradeoff is every draw reduces your owner’s equity, and you need to plan ahead for taxes since there’s no withholding.
A salary provides stable, predictable income and keeps your personal tax payments on autopilot. For S Corp and C Corp owners, there’s an added benefit because your salary is a deductible business expense that reduces the company’s taxable income.
How do you pay yourself as a new startup founder with no profit?
“If your business hasn’t turned a profit yet, your options depend on your entity type. Sole proprietors and single-member LLCs can take an owner’s draw, even without profit. But drawing more than your equity balance creates a negative capital account, which can have tax consequences. A tax professional can help you structure this correctly from the start.”
— Janet Berry-Johnson, CPA and OnPay contributor
How much should an owner’s draw be?
There’s no set rule. It’s entirely at your discretion. Ideally, you take an amount that covers your personal expenses while leaving enough in the business to cover operating costs and future investments. That said, you can technically draw up to 100% of your owner’s equity, though doing so would leave the business without a financial cushion.
Salary vs. owner’s draw at a glance
| Salary | Owner’s draw |
| What is it? | - Fixed payments on a regular schedule
| - Discretionary payments taken whenever you choose
- Can be noncash
|
| Pros | - Taxes withheld so no big tax bill at year-end
- Easy to budget for personally and for the business
| - More flexibility, take what you need when you have the cash
- No fixed payment schedule required
|
| Cons | - Requires consistent cash flow to maintain
| - No taxes withheld, so you need to plan for year-end tax liabilities
|
| Eligible entity types | - LLC (if taxed as S Corp or C Corp)
- S Corp (active owners must take a salary)
- C Corp (active owners must take a salary)
| - Sole proprietor
- Partnership
- LLC
- S Corp (you can take draws in addition to a salary)
|
Salary, draws, and the IRS
Your business entity type plays a major role in how you can pay yourself. Here’s a closer look at the implications for each.
Sole proprietor
Draws are the only option for sole proprietors. You cannot legally pay yourself a W-2 salary. That’s because owner payments aren’t a deductible expense for sole proprietors. The IRS treats any money you pay yourself as a draw, and treats all business profits as your personal income.
The good news is you won’t pay tax on your draws directly. The bad news is those draws don’t reduce your taxable income like a salary would.
Here’s a quick example: Say your customers buy $100,000 worth of products over the course of a year, your business expenses are $60,000, and you’ve taken draws of $30,000.
Your taxable income is still $40,000 — the business profit — because draws don’t reduce it. The IRS taxes that $40,000 as self-employment income, so you owe 15.3% for FICA, plus federal income tax. However, you can deduct half of your self-employment taxes, which provides some relief.
Partnership
Partners in a partnership must also use the draw method. The IRS doesn’t consider partners employees, so paying yourself a salary isn’t an option. The IRS taxes you on your share of the partnership’s income, much like a sole proprietor.
Limited Liability Company (LLC)
The IRS treats single-member LLCs (those with only one owner) as a “disregarded entity.” This means you’re taxed like a sole proprietor by default, with the same tax considerations described above.
You do have flexibility, though. The IRS lets you choose how you’re taxed. You can file Form 8832 to elect C Corp tax treatment, or file Form 2553 to elect S Corp tax treatment. If you don’t make an election, the default is disregarded entity (sole proprietor) taxation.
For multi-member LLCs, the default is partnership taxation. You can file Form 8832 to elect C Corp tax treatment or Form 2553 to elect S Corp treatment. That LLC loophole lets you keep your entity structure, but potentially lower your taxes.
For multi-member LLCs, the IRS default taxation classification is as a partnership. You’ll have the same taxation concerns as partnerships, as discussed above. You can file Form 8832 to elect taxation as an S Corp, only if all members agree.
Related reading
Learn more about what Form 8832 is and the steps a business takes to change its classification for federal tax purposes.
S Corporation (S Corp)
If you’re actively involved in running your S Corp, you must pay yourself a salary. The IRS requires it to prevent owners from avoiding employment taxes by taking everything as distributions. That salary must be “reasonable compensation” relative to your role, skills, experience, and what comparable businesses pay for similar work. You can also take draws as an S Corp owner, but not as a substitute for a reasonable salary.
On the tax side, both your salary and the employer portion of FICA (7.65%) are deductible business expenses that reduce the company’s taxable income. Because an S Corp is a pass-through entity, any remaining business profits flow through to your personal tax return and the IRS taxes them at your ordinary income tax rates.
Unlike sole proprietor or partnership income, those pass-through profits aren’t subject to self-employment tax. That’s the tax advantage of S Corp status: the more profit you can take as a distribution after paying yourself a reasonable salary, the less you pay in employment taxes overall.
C Corporation
Like S Corp owners, C Corp shareholders actively involved in the business must take reasonable compensation. The same salary and employer FICA deductibility applies.
The key difference is C Corp shareholders generally don’t take draws. If you want to take out money beyond your salary, the company pays it out as a dividend, which isn’t tax-deductible for the company but is taxable income on your personal tax return.
A better alternative for taking additional compensation is a bonus, which is a deductible business expense. Just be careful not to tip into unreasonably high compensation territory. The IRS treats excessive pay as a disguised profit distribution, and it can recharacterize some of that income as a dividend, taking away the tax deduction.
Simple and seamless
I love OnPay because it has a user-friendly interface where other payroll services can sometimes be confusing for a small business owner to understand and use effectively. OnPay also integrates with Quickbooks online seamlessly, which saves me a ton of time from manually inputting payroll reports.
— Alyssa Johnson, Electric Regatta LLC
How to pay yourself as a business owner: Determining reasonable compensation
Once you settle on the right payment method, the next question is what “reasonable compensation” means in practice. The IRS acknowledges it’s a facts-and-circumstances determination. As the tax code explains:
But that doesn’t really tell you how much you should pay yourself as a business owner. The good news is that the IRS has issued some clarification on this front over the years. The agency defines “reasonable” on its website as follows:
“It is, in general, just to assume that reasonable and true compensation is only such amount as would normally be paid for like services by like enterprises under like circumstances.”
That’s not a precise number, but based on how courts have evaluated reasonable compensation disputes, the IRS identifies several factors that go into the determination, including:
- Training and experience
- Duties and responsibilities
- The time and effort you devote to the business
- Dividend history
- Payments to non-shareholder employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar services
- Compensation agreements
- The use of a formula to determine compensation
There are also more practical ways to benchmark it. For market data, salary research platforms like Glassdoor, Payscale, and Salary.com are a good starting point. The U.S. Bureau of Labor Statistics also maintains occupational wage data by industry.
Beyond market benchmarks, your own cost of living and personal expenses can also inform what you pay yourself. Just make sure the number you land on is defensible against the IRS criteria mentioned above.
Be careful with loans!
Don’t classify money you take from the business as a loan unless you plan to treat it like one. Owner or shareholder loans should have terms like those required in traditional lending arrangements, including a signed promissory note, a stated reasonable interest rate, a repayment schedule, and consequences for non-payment. Without those elements, the IRS may reclassify the “loan” as a dividend or salary, with tax consequences to match.
How do you handle personal expenses accidentally paid by the business account?
“Treat it as an owner’s draw. Record the transaction in your books as a draw against owner equity rather than a business expense. This keeps your financial statements accurate and maintains the separation between business and personal finances.”
— Janet Berry-Johnson, CPA and subject matter expert
Plan ahead for taxes
The U.S. tax system is pay-as-you-go, meaning the IRS expects you to pay taxes as you earn. If you’re using the draw method, the business doesn’t withhold payroll taxes, so you need to set aside funds and make quarterly estimated payments to the IRS. Falling short can trigger an underpayment penalty. If you pay yourself a salary, payroll software can handle withholding and remittance automatically, taking the guesswork out of the process.
Paying yourself: Make the right call for your business
How you pay yourself as a small business owner has real tax consequences for you and your business. Sole proprietorships, single-member LLCs, and partners in a partnership must take an owner’s draw, with no taxes withheld upfront. S Corp and C Corp shareholders take a regular salary, with taxes withheld and sent to the IRS each pay period.
Understanding the difference between these two approaches can save you from costly surprises at tax time. If you still have questions, a tax pro who knows your business is your best resource. No two businesses are the same, and the right answer depends on your entity type, income, and goals.
This article is for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.
