How to Pay Yourself Legally Without Paying a Fortune in Taxes

How to Pay Yourself from Your Business

Paying yourself isn’t just about moving money from one account to another. It’s about doing it correctly to stay compliant, avoid penalties, and not trigger unnecessary taxes. The IRS doesn’t care that your rent is due; they care how you report earnings. The first thing you need to know? How to pay yourself as a business owner hinges on your business structure.

Sole Proprietor or Single-Member LLC? Meet the Owner’s Draw

If you’re running a sole proprietorship or a single-member limited liability company (LLC), you don’t technically “pay yourself,” not in the W-2 sense. Instead, you take what’s called an owner’s draw. That means you pull money from your business account and move it to your personal account. Sounds simple, right? Sort of. Let’s take a quick look at where people get tripped up.

How Are Owner Draws Taxed?

How owner draws are taxed depends not on when you draw them, but when your business earns them.

The IRS considers all net business income on your Schedule C taxable, whether you draw the money or not. So if your business made $60,000 and you only took $20,000, you still owe taxes on the full $60,000.

That includes:

• Income tax—based on your personal bracket; and

• Self-employment tax—currently 15.3% for Social Security and Medicare (as of 2024, per IRS guidelines).

The takeaway? Drawing less doesn’t lower your tax bill. That’s one myth to torch now. So, let’s look at how to pay yourself as a business owner with an S Corp.

How to Pay Yourself as a Business Owner with an S Corp

If your LLC has elected to be taxed as an S Corporation, or if you’re already an S Corp, you’re allowed to split your income into two buckets:

• A reasonable salary via payroll, subject to payroll taxes; and

• Distributions which are not subject to self-employment tax.

This is where innovative founders reduce their tax liability. You run payroll through a tool like Gusto or QuickBooks Payroll. You pay yourself a real wage and withhold taxes like any other employer. Then, if your business has profit left over, you can take a distribution. That’s the “tax-efficient” part. It’s still subject to income tax but not the 15.3% self-employment tax, which can be a game-changer.

Remember: The IRS can reclassify your distributions and penalize you if your salary is unreasonably low (say, $12,000/year while the business earns $100,000).

How to Handle Self-Employed Payroll

If you’re thinking, Wait, do I need to set up self-employed payroll for myself? The answer depends on your entity type:

• Sole proprietors and single-member LLCs. These entities don’t run formal payroll. They take owner draws.

• S Corps. These must run payroll, which means withholding federal income tax, Social Security, and Medicare, and paying employer-side taxes.

• Partnerships. Partners are not paid via payroll. They use guaranteed payments and draws.

If you’re an S Corporation and don’t pay yourself via payroll, you’re out of compliance, and the IRS will notice.

How to Pay Yourself Without Getting Slammed by Taxes

Here’s where it all comes together. To pay yourself legally and minimize taxes, you need a game plan. No, not a napkin sketch or gut feeling. A real strategy.

Start with this framework:

• Choose the proper structure. If you’re making over $50,000 in profit, an S Corp might save you money despite the extra paperwork.

• Pay yourself a salary if required. Skipping payroll when it’s legally required is asking for a penalty.

• Track all income and expenses meticulously. This affects your draw, tax liability, and retirement options.

• Make estimated tax payments quarterly. IRS Form 1040-ES helps to keep you penalty-free.

• Deduct everything you’re entitled to. This includes home office, mileage, and startup costs.

• Reinvest strategically. You don’t have to withdraw every dollar. Letting profits build can reduce your tax burden and fuel future growth.

Paying yourself shouldn’t feel like breaking into your own vault. It should feel like what it is: running a business with clarity and control.

Paying Yourself When Cash Flow Is Tight

What if you barely have enough to cover software subscriptions and Wi-Fi, let alone pay yourself? Here’s the no-nonsense approach:

• Set a fixed draw. Even if it’s $150 a week, you’re not “borrowing” money from the business. You’re acknowledging your work has value.

• Separate personal and business accounts. This isn’t optional. Commingling funds is a legal and accounting mess.

• Reinvest what you can. Skipping a payday now can lead to bigger future draws, especially if you plan to grow.

• Build a tax buffer. Even tiny businesses need to hold back 25–30% for taxes.

• Create a profit-first system. Allocate funds for profit, taxes, and pay through multiple accounts from the start.

Your business exists to serve customers and to support you. If it does not do both, it is not sustainable.

Final Take: Don’t Pay the Price for Avoiding This

Knowing how to pay yourself from your business isn’t just smart; it’s survival. Whether you take an owner’s draw, set up self-employed payroll, or figure out how your owner draws are taxed, every dollar you pull out of the business should be intentional.

You started this company to make a living. So start treating your compensation like it matters, even if it’s not a full paycheck yet. Even if it’s inconsistent. Even if you’re still figuring it out. Do it legally. Do it right. And don’t let taxes rob you of what you’ve built.

Disclaimer

Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Resources:

• Internal Revenue Service, Small business and self-employed tax center, link.

• Internal Revenue Service, S corporations, link.

• Internal Revenue Service, Schedule C and Schedule SE-1, link, link, link.

• Internal Revenue Service, About Schedule SE (Form 1040), Self-Employment Tax, link.

• Internal Revenue Service, About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), link.

• Internal Revenue Service, About Form 1040-ES, Estimated Tax for Individuals, link.