There are two mechanisms: an owner's draw, which is simply moving money from the business to yourself, and a salary, which runs through payroll with taxes withheld. Which one applies is not a preference — it follows from how your business is structured and taxed.
What applies to you
| Structure | How you take money | How it is taxed |
|---|---|---|
| Sole proprietor | Owner's draw | Income tax and self-employment tax on business profit, whether or not you draw it |
| Partnership member | Draw; sometimes guaranteed payments | Tax on your allocated share of profit, regardless of distributions |
| LLC, default taxation | Owner's draw | Same as sole proprietor or partnership, depending on member count |
| LLC or corporation with S-corp election | Salary through payroll, plus distributions | Payroll taxes on salary; distributions not subject to self-employment tax |
| C-corporation | Salary, and/or dividends | Salary is deductible to the company; dividends are taxed at both levels |
As a pass-through owner you are taxed on your share of the business's profit, not on what you withdraw. Leaving money in the business does not defer the tax. This is why owners are sometimes taxed on income they never took — and why a tax distribution provision matters in a multi-member operating agreement.
Owner's draws, done properly
A draw is not payroll. There is no withholding, so you handle the tax yourself through estimated payments. Mechanically it should still be deliberate:
- Transfer from the business account to your personal account — never pay personal bills directly from the business account. See opening a business bank account.
- Record it as an owner's draw, not as an expense. Draws reduce your equity; they do not reduce business profit.
- Take them on a schedule if you can. A regular amount is easier to budget around personally and easier to sustain.
- Check the business can afford it against your cash forecast, not just the balance today.
Salary under an S-corp election
If you have elected S-corp treatment, you are an employee of your own business and must run actual payroll: withholding, deposits, quarterly returns and a W-2. Paying yourself only in distributions is one of the most reliably identified problems in this area.
Reasonable compensation
The IRS requires the salary to be reasonable for the work you actually do. There is no fixed formula and no safe percentage. Factors that matter include your duties and hours, your training and experience, what comparable roles pay in your industry and region, and what the business can support.
Whatever figure you set, write down how you arrived at it and keep the comparison data. The problem in an examination is rarely the number itself; it is having nothing to explain it with. Revisit it annually as the business changes.
Deciding how much to take
-
Start with the business, not your budget
Work out what the business needs: operating costs, tax reserve, a cash buffer, and any planned investment. What remains is genuinely available.
-
Set aside tax first
Before taking anything, move the tax percentage aside. See estimated quarterly taxes.
-
Take a consistent base
A modest regular amount you can sustain beats large irregular withdrawals, both for your own planning and for the business's cash stability.
-
Handle surplus separately
Take additional amounts periodically once you can see the business is genuinely ahead, rather than adjusting the base up and down.
-
Review annually
As profit changes, revisit both the amount and — if relevant — whether your tax election still makes sense.
Things that are not draws
- Reimbursed business expenses. If you paid a genuine business cost personally, reimburse it and record it as that expense, with documentation.
- Loans to the business. If you put personal money in as a loan, document it properly with terms. Otherwise it is a capital contribution.
- Personal expenses paid by the business. Not a draw but a bookkeeping problem, and a commingling risk.
Questions owners ask
Can I pay myself as a contractor and issue myself a 1099?
No. An owner of a pass-through business is not a contractor to their own business, and an S-corp owner-employee takes a W-2 salary. This structure is a known error rather than a planning technique.
Do I have to take a salary from my LLC?
Not under default taxation — you take draws. It only becomes a salary requirement if you elect S-corp or C-corp treatment.
What if the business cannot afford to pay me?
Taking nothing is allowed for a pass-through owner. Under an S-corp election it is more complicated: if the business is generating profit and you are working in it, not taking a reasonable salary is the specific risk described above. If there is genuinely no profit, that is a different situation — worth discussing with your accountant.