Owner’s Draw vs Salary: How Should You Pay Yourself?

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Every business owner eventually asks the same question: how do I actually pay myself? In the US, there are two main ways, an owner’s draw or a salary, and which one you can use depends mostly on how your business is set up. Getting it right affects your taxes, your cash flow, and how clearly you can see whether the business is really profitable.

This guide explains both methods in plain English, walks through an illustrative example for a one-person bookkeeping firm, and gives a simple routine for paying yourself. Tax rules change and depend on your situation, so check the details with an accountant.

What Is an Owner’s Draw?

An owner’s draw is money you take out of the business for personal use. It’s not a wage, so no payroll taxes are withheld when you take it.

Draws are the usual way to pay yourself if you run a:

• Sole proprietorship
• Single-member LLC taxed as a sole proprietorship
• Partnership or multi-member LLC taxed as a partnership

In these setups, the business’s profit is taxed on your personal return whether you draw it out or not. The draw itself isn’t taxed again. You’ll usually owe income tax and self-employment tax on the profit, so it’s wise to set money aside and make quarterly estimated payments.

What Is an Owner’s Salary?

A salary is a regular wage paid through payroll, with income tax and payroll taxes withheld, just like an employee.

You generally need to pay yourself a salary if your business is a:

• Corporation (C corp)
• LLC or corporation that has elected S corp tax treatment

S corp owners who work in the business are expected to pay themselves a reasonable salary for the work they do. Profit above that can often be taken as a distribution. That split is one reason some owners choose S corp status, but it brings extra payroll paperwork and costs.

Owner’s Draw vs Salary at a Glance

	Owner’s draw	Salary
Typical business type	Sole proprietor, partnership, most LLCs	Corporation, S corp
Taxes withheld	No	Yes, through payroll
Amount	Flexible, can change each month	Set amount on a schedule
Business expense	No, it’s not deducted	Yes, wages are deducted
Paperwork	Low	Payroll filings each quarter

Worked Example: A One-Person Bookkeeping Firm

A bookkeeper runs her practice as a single-member LLC. All figures are illustrative.

Line	Amount per year
Revenue	$110,000
Business expenses (software, insurance, office, training)	$22,000
Profit	$88,000

She takes a draw of $5,000 a month, or $60,000 a year. That doesn’t change her taxable profit. She’s taxed on the full $88,000, so she sets aside part of every payment that comes in for her quarterly tax payments.

The $28,000 she leaves in the business, minus the tax she sets aside, builds a cash reserve.

Now, suppose a few years later profit grows and her accountant suggests electing S corp status. She’d then pay herself a reasonable salary through payroll and might take some of the remaining profit as distributions. Her total pay could stay similar, but the paperwork and the tax picture change.

How Much Should You Pay Yourself?

1. Start with profit, not revenue. You can only safely take what the business actually earns. See revenue vs income vs profit.
2. Set aside tax first. Move a percentage of every deposit into a separate tax account.
3. Keep a cash buffer. Leave enough in the business to cover a few months of costs. The emergency fund idea applies to businesses too.
4. Pay yourself on a schedule. A fixed draw on the same day each month is easier to plan around than taking money whenever it’s there.
5. Review every quarter. Raise or lower your pay based on actual profit and cash, not hopes.

Some owners use a percentage-based system like the one in Profit First, where a set share of every deposit goes to owner pay.

Frequently Asked Questions