Business

How to pay yourself as a small business owner

By Kari Brummond for Xero Stacker

Updated June 1, 2026 3:13 PM

You work hard for your business, but do you pay yourself? And if so, are you handling it in the right way from a tax, cash flow, and budget perspective? The right approach depends on multiple factors. According to Xero's guide to paying yourself as a business owner, your business's structure is the most critical.

Whether you run a sole proprietorship, partnership, or corporation determines how you should pay yourself - when to cut the check, how to label it in your accounting records, and the tax forms you need to file. Sometimes, you have to pay yourself (at least on paper), even if you don't take any money out of the company. Let's dig into the details.

Owner payments are based on business structure

Owner payments have different names based on the business's structure:

Sole proprietorships: owner draws
Partnerships: distributions or guaranteed payments
S corp: wage or salary and distributions
C corp: wages or salary and dividends

What if you have an LLC? That's the most common business structure, but it doesn't have its own tax classification. By default, single-member LLCs are sole props, while multi-member LLCs are partnerships. If you like, you can opt to have your LLC taxed as an S corp. Then pay yourself accordingly.

Paying yourself when you're the boss

You're in business to make money, but the IRS requires you to follow very specific protocols with owner payments. And again, it's all based on your structure.

With sole props and partnerships, whether or not they're LLCs, paying yourself is easy. These are owner draws or distributions delivered through pass-through entities. You simply cut a check, transfer money from your business to your personal account, or even keep some cash out of the deposit. Then, label the withdrawal as a "draw" if you're a sole prop or a "distribution" if you're a partnership.

Partners can also get guaranteed payments. That's completely separate from distributions, and it's typically based on investing or working in the company.

Say Libby and Taylor start a partnership and decide to split the profits 50/50. Libby's not involved in day-to-day operations, but Taylor manages the company, so they agree that she gets $5000 in guaranteed payments every month.

The payment takes the same form as a distribution (check, bank transfer, etc.), but it's accounted for differently both in the books and on the tax forms.

For S and C corps, it gets a little more complicated. Owners who work in these companies are called shareholder-employees, and they must pay themselves wages or a salary through the payroll system, just like any other employees.

The big difference between paying owner and employee wages is timing. You can run owner payroll once a week if you want, but you certainly don't have to. A lot of employee-shareholders do it once a year.

S corp owners report their share of the business's profits as distributions, even if they don't take the money out of the company. C corps, in contrast, can keep profits in the business, but if distributed to owners, the payments are called dividends.

Sole proprietors pay tax on profits

All owner payments get reported and taxed differently, and the rules can be surprising, so you need to understand how it all works before tax season hits.

With sole props, you report the profit as income and pay self-employment tax on the full amount and income tax as applicable in your situation. At tax time, it doesn't matter how much you took out or kept in the business - the IRS taxes you on all the profits.

Often, the profit is the cash left at the end of the year, but not always. It depends on how you handle depreciation, loan payments, owner contributions, and other details.

For example, say your business brings in $1 million in revenue, spends $800,000 on expenses, and buys equipment in cash for $150,000. You don't take out a dime all year long, and you keep the remaining $50,000 in the business account for next year.

When you file your tax return, you depreciate the equipment over five years, meaning you claim $30,000 this year. That makes your profit $170,000. Here's the math:

Revenue: $1 million

Expenses: $800,000

Depreciation: $30,000

Profit: $170,000

You report the $170,000 profit on Schedule C with your individual tax return, and even though you didn't "pay yourself," it's all taxed.

Partnerships pay tax on guaranteed payments and profits

Partnerships are taxed almost exactly the same as sole proprietors. The only differences are guaranteed payments and how it's all reported.

With both guaranteed payments and distributions, the partnership just gives money to the partners. You don't have to withhold any tax. Transfer the funds and label the transactions as "guaranteed payments" or "distributions" in your accounting records.

Then, at tax time, file Form 1065 (U.S. Return of Partnership Income) to report the partnership's revenue, expenses, and profit. This return is informational. It doesn't create a tax bill. You just file it to show the IRS a tally of the business's earnings and how profits were distributed.

Say you and Bob launch a 50/50 partnership. It has $40,000 in profit after accounting for all depreciation and expenses, including a $60,000 guaranteed payment to Bob.

The partnership reports these details on Form 1065 and then distributes a K-1 to each partner. Your K-1 shows $20,000 in "ordinary business income" - that's your half of the $40,000 profit. Bob's K-1 shows $20,000 in business income and $60,000 in guaranteed payments.

You each report your K-1 income on your individual income tax returns, and you face self-employment tax on all of the earnings, plus income tax based on your situation.

With partnerships, you report the profit as income, even if you left all the money in the business and didn't take any distributions.

S corp owners pay tax on salaries and profits

S corp owners have to jump through a few more hoops, but it's often worth it for the tax benefits. If you work in the business, the S corp must pay you a reasonable amount. That could range from hourly minimum wage for retail work to a competitive annual salary for managing your graphic design company.

The S corp pays you the same way it pays any other employee. It withholds FICA and income tax from your payment, makes matching Social Security and Medicare contributions, and pays state and federal unemployment taxes. Then, it gives you a W-2 at the end of the year and claims the wages and employer taxes as business expenses.

At tax time, the S corp files Form 1120-S to report its revenue, expenses (including owner wages or salaries), and profit, but it doesn't pay any tax with that form. Instead, it generates a K-1, showing each owner's share of the profits.

When you file your individual tax return, you report your earnings from the W-2 and the K-1. The W-2 income is subject to FICA taxes, but at this point, those taxes have already been paid - half by the business and half from your paycheck. The K-1 income is not subject to FICA or self-employment taxes, which can save you a lot of money. All of the income, of course, is subject to income tax based on your situation.

Just like with sole proprietorships and partnerships, you report the profit as income, even if you didn't take the cash out of the business.

You may pay tax twice as a C corp

C corps also pay W-2 wages to owners who work in the business, and for both the business and the owner, the reporting is exactly the same as it is for S corps.

The difference is that C corps pay tax at the corporate level. They file a 1120-C and pay corporate income tax on profits. Then, if the corporation distributes profits to owners, they're called dividends. Owners report and pay tax on dividends even though the company already paid tax on those profits.

What's the best structure for paying yourself?

It really depends, but the best option is to start with an LLC. Then, handle taxes as a sole proprietor if you've got one member or a partnership if you've got multiple.

As profits grow, it can be beneficial to elect to be taxed as an S corp. That can save money on self-employment tax, but requires a few extra tax forms. Most small business owners stay away from the C corp structure because it's just too complex.

How much should you actually pay yourself?

It depends on your goals for the business and your personal finances. With some businesses, you'll take the bulk of the profits from day one, with others, you might reinvest the profits for a decade or more before pulling anything out. As a general rule of thumb, try to focus on investing in the business during the early stages, give yourself a livable wage or a percentage of profit during growth stages, and reward yourself with a stable income once you're well established.

Make sure you understand how it works, or you'll face trouble at tax time. Don't run owner payments for sole proprietorships or partnerships through payroll software, but if you have an S corp, absolutely don't forget to do that. Talk with an accountant to get it all set up correctly so you can stay tax-compliant while also keeping yourself paid.

This story was produced by Xero and reviewed and distributed by Stacker.

This story was originally published June 1, 2026 at 11:00 AM.