How to pay yourself from your business

July 6, 2025

By Nadia Cabrera-Mazzeo, Esq.

Short Answer: For S corps or LLCs taxed as S corps, you must pay yourself a reasonable salary before taking any other money out. For LLCs, you can take money out at your discretion.

Congratulations! You started a business, got it off the ground, and are at a point where you can actually start taking money out of the business for yourself. Whether you’re paying yourself back for start-up costs or are ready to earn a wage, making personal money from your business is a huge step. But what are the proper procedures for paying yourself from a business that you own? And what are the tax implications of each method?

LLCs, The Owner’s Draw, and Self-Employment Taxes

For LLC owners looking to pay themselves, the process is straightforward: you simply take money out in what is called an “owner’s draw.” This can look like writing a business check to yourself, making an electronic transfer from your business account to your personal account, or withdrawing cash from your business account. Make a note of the payment for bookkeeping purposes, but otherwise, that’s it. NOTE: This method only applies to LLCs that are not taxed as S corps.

The owner’s draw method is the simplest way to pay yourself from your business. The default way that an LLC is taxed is the same as a sole-proprietorship, meaning all business income and losses are reported on the owner’s personal tax return. This means that all business profits are subject to self-employment tax.

You know how when you work at a regular job, a certain portion of your paycheck is withheld for taxes? That portion that’s withheld is half of what the IRS requires for Medicare and social security taxes. Your employer pays the other half. When you are self-employed, you pay both halves of those taxes because you are technically both the employee and the employer. That’s the self-employment tax and it is separate from regular income tax. This method will meet the needs of many small businesses. For others, especially when profits start to climb and there are more partners or employees, an S corp tax election may be beneficial.

S Corps, Reasonable Compensation, and Tax-Efficient Draws

For S corps or LLCs that choose to be taxed as S corps, you cannot take money out willy nilly in an owner’s draw and call it a day. An owner that works for their business, even in a lesser capacity, must pay themselves a reasonable salary before any owner can take a draw from the profits. For corporations, these draws are called “distributions” and they are not subject to self-employment tax.

For the salary, like in any other job, half of the Medicare and social security taxes are withheld from the paycheck and the other half are paid by the business as the employer. Once salaries and wages are paid to employees, then owners are allowed to draw from the profits “tax-free” (but they will still be subject to regular income taxes on the owner’s personal tax return).

Note: This is a very basic introduction to this topic. Depending on the situation, there may be many more IRS rules and other considerations that apply.

What is reasonable compensation?

The IRS knows that people want to pay as little as possible in taxes, so it does not allow owners to pay themselves $1 in salary and take thousands in distributions. This is where “reasonable compensation” comes in. There are several ways to calculate what would be a reasonable salary, but it basically has to compare to what someone would make in a similar position within that industry.

For example, it may be reasonable for an owner of a ranching business to pay themselves an official salary of $30,000 even if the business itself makes much more, because that is within the usual salary range for ranchers. However, it would not be reasonable for a plastic surgeon to pay themselves $30,000 seeing as the usual salary range for plastic surgeons is much higher.

Reasonable compensation depends on the industry, location, and other factors, but it does not depend on how much money the business actually makes unless your salary is lower than the “reasonable” amount because business income is low at the time.

It is often in the owner’s best interest to pay themselves a reasonable salary on the low end of the spectrum and then take additional money in distributions when the business can afford it.

What if I don’t pay myself at all?

Another consideration to take into account when deciding what to pay yourself from your S corp is whether the business can afford your reasonable salary. Salaries are regular, consistent payments of the same amount, so business income needs to be more or less consistent. As the business owner, you can choose not to take a salary at all, but then you cannot take any distributions either. You can choose to take just a salary with no distribution, or a salary and distribution, but you cannot take a distribution without a salary (because then you improperly evade paying taxes).

If you choose not to take a salary for a year or more, you have to pay yourself back for those wages (and pay taxes on them) before you can take any distributions. Again, the IRS isn’t going to let you get away with not paying those payroll taxes.

For example, say your reasonable salary is $50,000. In Year 1, the business makes a profit of $25,000. You decide to waive your compensation and reinvest all of it into the business. In Year 2, the business makes a profit of $120,000. Now, you’ve got more than enough to pay yourself.

But before you’re allowed to take a distribution, you have to pay yourself $100,000 in salary ($50,000 from Year 1 and $50,000 from Year 2). In Year 3, the business makes another $120,000 in profits. You take $50,000 in salary with all the taxes and another $50,000 in distributions without taxes (but it’s still all subject to regular income tax on your personal tax return).

In short, you may pay less in taxes when your business is taxed as an S corp, but your business must be able to pay you a reasonable, regular salary before you can take any tax-efficient distributions on top of that. You have to know the rules and do it right. Otherwise, the IRS will likely find out and make you pay back taxes and even fines for improperly calculated compensation.

Don’t consider your business’s money as your own personal money

Remember that to keep your business’s liability shield strong, you have to maintain an arms-length relationship with your business and keep finances separate. Even if you’re the only owner of the business, the business’s money is not all your money. The business should be able to stand on its own two feet with its own income before you make huge draws or take big distributions.

Everything in this blog post assumes that your business money is kept separate from your personal money. You should open a dedicated business bank account if you don’t have one already.

Law office of Nadia Cabrera-Mazzeo, Esq.

Based in Taos, serving clients throughout New Mexico

505 427 2025

nadia@honestcontracts.com

The information on this website is not legal advice and does not create an attorney-client relationship. The rates and fees listed on this website may not be the most up to date.