how to pay yourself as a business owner 5

How To Pay Yourself as a Business Owner in 2025

How, when, and how much to pay yourself isn’t always a simple decision. You need to understand your options—and any requirements—to make sure you pay yourself properly. If you own a corporation, you need to decide on a fair salary to pay yourself. According to the IRS, your salary as a business owner should compare to the average pay for someone in your industry with your level of education and experience. The payment amount and method you use should cover all your personal obligations, such as a mortgage, car loan and basic expenses. If your finances aren’t strong or you aren’t paying yourself at all, that may put you at a disadvantage when seeking a small-business loan.

Your Business Entity Determines How You’re Permitted to Pay Yourself

Regularly check your cash flow to ensure your business remains healthy. Positive cash flow indicates you can afford to pay yourself; negative cash flow might necessitate adjustments in spending. It’s also a good idea to consult an expert if you’re unsure how to properly calculate your salary or distributions. As mentioned, paying yourself too little could raise red flags with the IRS, while paying yourself too much might result in taxes on excess distributions. Remember, even if you classify your activity as a hobby and make a profit, you must still report that income to the IRS. However, the tax implications and ability to deduct expenses differ significantly between hobbies and businesses.

• Since you and your business are considered the same, you can simply withdraw money from your business account for personal use.
• Whether and how you can use these methods depends on the structure of your business.
• Choosing the right option depends on your comfort level with financial tasks and the complexity of your business.
• She found herself paying herself out of personal savings just to keep operations running.

Paying Yourself Based on Your Business Type

• However, single-member LLCs can elect to be taxed as S-corporations by filing the necessary paperwork with the IRS.
• Besides being classed as a disregarded entity, you can have your LLC be classed as a corporation.
• The owner is still responsible for self-employment taxes on the business’s total net profits.
• Discover how Shopify helps you manage your business and make sales.
• There is no standard formula for how much you should pay yourself as a business owner.
• You’ll need to pay yourself a salary, and not an owner’s draw, if you own a corporation and are engaged in its day-to-day operations.

Alternatively, you can receive dividends if the corporation generates profits. But it’s important for owners to pay themselves properly and factor the cost into their budgets. Owner’s draws are more flexible and are often the best option for owners of smaller businesses with fluctuating cash flow. Keep in mind that taking too large a draw can negatively affect your business performance, as it reduces the capital available to cover operational expenses and grow the business.

Many people start with what they already do—like marketing or design—and package it into a consulting business. Some advantages to being your boss include getting to set your own schedule and work on projects you’re passionate about. Your products, price point, or ideal customer might change over time, and that’s normal.

LLC (Limited Liability Company): Single-Member vs. Multi-Member

A salary can be based on revenue or can be a set amount in a guaranteed payment. Paying yourself can be as simple as transferring money from the business to the personal bank account. But you have to be careful because you don’t want to be using a business account for personal use. If your business is a sole proprietorship, such as when you pay yourself as a freelancer, you can deduct expenses.

Things to Consider When Paying Yourself

It states that your salary must reasonably align with what you’d earn for the same job at a corporation or other business. Owning a business can mean freedom, but it can also require more discipline than a traditional job. To-do lists tend to be long, and the majority of tasks fall on you to complete, especially at first. You must also balance completing projects while carving out time to search for new clients. And even though you can technically take off time whenever you want, many new business owners find it difficult to fully step away in the beginning.

However, the rules regarding the owner’s draw in the case of an LLC vary depending upon laws of each country. So, as the owner of an LLC, you’ll need to go through the laws before considering the owner’s draw and its taxation. After deducting business expenses, the next step is to find out how much you should save for your taxes and other liabilities. As your business becomes more profitable, you can increase your salary or draw, but only if your business can sustain it. A common mistake is pulling too much too soon, leaving little for growth. For C-Corps, a salary is standard since owners are treated like employees.

Are you a freelancer, digital nomad, or small business owner in need of a real street address you can use to receive mail? We cover 8 of the best virtual mailbox services in the U.S, including their key features, pricing, and pros and cons. Even if you pay yourself via payroll, you probably have income where taxes were not withheld. You’ll want to ensure you have enough to pay what’s due at tax time.

Mixing personal and business finances

Paying yourself a salary works well if your business finances are stable and predictable, as it creates a regular cash flow. However, paying yourself too much can lead to cash flow problems for the business, while underpaying yourself can attract unwanted scrutiny from the IRS. If your business is a corporation and you work in the business, you are an employee of the business and you should pay yourself a salary, with taxes withheld. You do not have to take all your compensation as salary—you also can take a draw or distribution. If you are a single-member LLC (limited liability company), you also have the option to take a draw. The benefit of this structure is that your personal assets, including your home and vehicle, are protected.

Discover how Shopify helps you manage your business and make sales. Michelle Johnson, of oat milk brand Ghost Town Oats, says she saw an immediate need to appeal to a more diverse customer base. Talk to people you’d like to use your services to understand their pain points and what your solutions should look like. Babba suggests starting sooner rather than later, so you can collect data and feedback how to pay yourself as a business owner from potential customers. You may already have a business idea if you’ve reached the stage where you want to be your own boss.