How to Pay Yourself as a Small Business Owner: Salary vs. Owner’s Draw

Running a business comes with a long list of responsibilities — and one of the most confusing is figuring out how to pay yourself. Should you take a salary? An owner’s draw? Both?

The answer depends on how your business is structured, how you manage your cash flow, and what kind of tax treatment you want.

In this guide, we’ll break it all down — clearly and simply.

💡 Why It Matters

Paying yourself isn’t just about taking home money — it affects:

Your taxes
Your cash flow
Your personal finances
How lenders and investors view your business

Making the right choice now can save you from costly mistakes later.

🏛️ Step 1: Know Your Business Structure

The way you’re legally set up plays a huge role in how you can pay yourself.

Entity Type	How You’re Paid	Tax Notes
Sole Proprietor	Owner’s Draw	Pay self-employment tax
Partnership	Owner’s Draw	Same as above, split by % ownership
LLC (Single or Multi-Member)	Owner’s Draw (or Salary if S-Corp)	Depends on tax election
S-Corp	Reasonable Salary + Dividends	Must run payroll, pay yourself via W-2
C-Corp	Salary + Dividends	Salary is deductible; dividends are not

💵 What Is a Salary?

A salary is a consistent, scheduled payment (like a W-2 employee would receive).

Pros:

Predictable income
Easier to budget
Looks good to lenders
Required for S-Corp owners

Cons:

You must run payroll
Requires withholding taxes
Can’t easily fluctuate with business income

🧾 What Is an Owner’s Draw?

An owner’s draw means you transfer money from your business account to your personal account — simple as that.

Pros:

Super flexible
No payroll setup required
Works well for new or inconsistent income

Cons:

No taxes withheld (you’ll owe later)
Harder to show steady income to lenders
Can lead to overspending if not tracked

👀 So… Which Should You Choose?

✅ If you’re a sole proprietor or standard LLC:

Start with an owner’s draw. Just be sure to set aside money for taxes (a good rule of thumb is 25–30%).

✅ If you’ve elected S-Corp status:

You’re required to pay yourself a “reasonable salary” before taking any profits. This means setting up payroll, withholding taxes, and filing quarterly.

✅ If you’re unsure:

Start with an owner’s draw, then talk to an accountant once your income is stable. You may benefit from switching to S-Corp status as you grow.

🧮 Bonus Tip: Use the 50/30/20 Rule

Not sure how much to pay yourself?

Here’s a simple budgeting approach:

50% for operating costs (rent, tools, etc.)
30% set aside for taxes
20% to pay yourself

As income grows, adjust your draw or salary — but never pay yourself everything in the account. Leave room for expenses and taxes.

📌 Final Thoughts

There’s no one-size-fits-all answer to how you should pay yourself. But understanding the difference between a salary and an owner’s draw is the first step toward building a financially sustainable business — and avoiding IRS headaches down the road.

👉 What’s Next?

Download our Free Owner Pay Calculator [COMING SOON]
Read: 1 5 Essential Tax Deductions for Small Business O wners