How you pay yourself depends mainly on how your business is set up for tax purposes. The two broad options are an owner draw (or distribution) and a salary paid through payroll. Using the wrong one, or recording it incorrectly, can cause problems with both your books and your taxes.

Sole proprietors and single-member LLCs

The IRS explains on its sole proprietorships page that a sole proprietor is someone who owns an unincorporated business by themselves. The business's profit is reported on the owner's return. Money you take out is generally an owner draw, not a wage and not a business expense. Your taxable profit is the same whether you draw a lot or a little. Self-employment tax generally applies to net earnings; see the IRS self-employment tax page.

A single-member LLC is often treated the same way for federal tax unless it elects otherwise; the IRS explains this on its LLC page.

Partnerships

Partners generally take draws or distributions from the partnership, and may receive guaranteed payments for services. Each partner's share of profit is reported to them by the partnership. The partnership agreement usually sets out how draws work.

S corporations

The IRS S corporations page explains that S corporations pass income, losses, deductions and credits through to shareholders. Shareholders who work in the business are typically paid wages through payroll, with withholding, and may also receive distributions. How wages and distributions are balanced is a tax decision that should be made with your adviser.

C corporations

Owners who work in a C corporation are generally employees and receive wages through payroll. Profit paid out to shareholders is a dividend, which is taxed differently.

How to record each one

  • Draws and distributions: record to an equity account (owner draws or distributions), not an expense
  • Wages: run through payroll; the business records wage expense and employer taxes
  • Reimbursements: if you pay a business cost personally, record the expense with its receipt and reimburse yourself, or record it as an owner contribution

Common mistakes

  • Recording draws as "owner salary" expense in a sole proprietorship
  • Paying an S corporation owner only through distributions without discussing wages with an adviser
  • Taking money out without recording it at all
  • Personal bills paid from the business account and coded as expenses

Key terms

  • Owner draw: money taken out of an unincorporated business by its owner, recorded in equity.
  • Distribution: a payment of profits to the owners of a corporation or LLC, recorded in equity.
  • Guaranteed payment: a payment a partnership makes to a partner for services or capital, set without regard to profit.
  • Wages: pay to an employee, including an owner-employee, run through payroll with withholding.
  • Dividend: a distribution of a C corporation's profits to its shareholders.
  • Retained earnings: profits kept in the business rather than paid out.

Planning cash

Whatever the method, take money out on a schedule that leaves enough in the business for tax payments, payroll and bills. A simple cash forecast helps.

Read about business structure tax considerations, our payroll services for owners on payroll, and our accounting services for planning.