It’s one of the most common questions we hear from business owners: "How do I actually pay myself?"
It seems like it should be simple. You own the business. The money is sitting in the account. So you just move it to your personal checking, right?
Sometimes. But the correct answer (and the IRS-compliant answer) depends on how your business is structured.
Get this wrong and you could owe back taxes, self-employment tax penalties, or trigger an audit. Get it right and you’re protected, compliant, and probably paying less in taxes than you would otherwise.
Here are the three most common business structures and exactly how compensation works in each one.
If you’ve formed an LLC but haven’t made any special tax elections, you’re likely being taxed as a sole proprietorship. This is called your “default treatment.”
In this setup, the way you pay yourself is simple: you take a draw.
A draw is just a transfer of money from the business account to your personal account. You’re not running payroll. You’re not issuing yourself a W2. You’re not calculating withholding. You’re just moving money.
In fact, you’re legally prohibited from paying yourself wages as a sole proprietorship owner. The IRS doesn’t recognize you as an employee of your own sole prop. Your income runs through Schedule C on your personal tax return, and you pay self-employment tax on the net profit — not on your draws.
One important distinction: this rule applies to you as the owner. Your spouse is a different story. If your spouse works in the business, there are legitimate reasons to put them on payroll and pay them a reasonable wage on a W2. That can actually create tax advantages in certain situations.
Bottom line for sole props: take draws freely. Just make sure you’re setting aside money for estimated taxes on your profits, because nobody’s withholding it for you.
This is where things get more structured — and more advantageous, if done correctly.
When your LLC elects S corporation tax treatment, you get a significant benefit: the ability to reduce self-employment tax. Instead of paying self-employment tax on all of your business profits, you pay it only on your W2 wages. Profits distributed beyond that salary are not subject to SE tax.
The catch: the IRS requires you to pay yourself what’s called reasonable compensation.
Reasonable compensation means paying yourself what you would normally pay someone else to do your job. If you’re a solo accountant running your own firm, you can’t pay yourself $25,000 a year and take $200,000 in distributions to avoid payroll taxes. The IRS will call that out.
In practice, this means:
So the structure looks like: W2 salary (reasonable compensation) + additional draws/distributions from profits if you want to pull more out of the business.
The key is setting the salary at a defensible level. Too low and you’re inviting IRS scrutiny. Too high and you’re unnecessarily increasing your payroll tax burden. A CPA who knows your industry and revenue level should help you land in the right range.
If you have a multi-member LLC that hasn’t elected S corporation status, you’re likely being taxed as a partnership. This applies to two or more owners operating together under a partnership or multi-member LLC structure.
Here, your compensation options are a little different.
You can take a guaranteed payment. A guaranteed payment functions similarly to a wage in that:
You can also take draws beyond your guaranteed payment, similar to how distributions work in other structures.
The key difference between a guaranteed payment and an S Corp salary: there’s no W2 involved. Your compensation runs through the K-1 and you’re responsible for paying self-employment tax on your share of the income.
Sole Proprietorship / Single-Member LLC (default): Owner draws only. No W2, no payroll. Spouse can be on payroll.
LLC Taxed as S Corporation: Reasonable W2 compensation required. Additional draws/distributions allowed beyond salary.
LLC Taxed as Partnership: Guaranteed payments (on K-1) and/or draws. No W2 required.
It’s not just about following the rules. How you pay yourself directly affects:
Getting this right from the start is far easier than correcting it after the fact. And if you’re not sure which entity structure you’re operating under, or whether your current structure still makes sense as your revenue grows, that’s worth a conversation with your CPA.
There’s no universal answer to how you pay yourself as a business owner. It depends on your legal structure, your tax elections, and your revenue level.
Sole prop? Take draws.
S Corp? Pay yourself a reasonable salary and then take draws on top.
Partnership? Guaranteed payments and draws.
If you’re operating in Louisiana and want to make sure your structure is set up correctly, and that you’re paying yourself in the most tax-efficient way, we’d be glad to walk through it with you.