How do Small Business Owners Pay Themselves?

Posted on 17 November, 2021

Establishing a small business may be a manifestation of your dreams, but more importantly, it’s your livelihood. You work hard so that you can reap the rewards of your labor. What is the best way to pay yourself as a business owner? If you own one of the 31 million small businesses in the U.S., it can be a challenge to structure your income in a way that’s consistent and sufficient. In addition to ensuring that you earn enough, you want to minimize your tax liability, too. Consider the following four options for small business owners to pay themselves.

Establishing a Business Entity

The first step to getting paid as a small business owner is choosing what type of business entity you want to maintain. The main options are a corporation, sole proprietorship, partnership, or limited liability corporation. Which one is best depends on what type of business you run and how you want to be paid. If you would like to draw a salary, an LLC or corporation is the best bet. If you prefer the freedom to withdraw payments at any time, however, a sole proprietorship may be the better option.

Taking an Owner’s Draw

If you chose to establish a partnership or sole proprietorship, you will likely pay yourself by taking an owner’s draw. This is done by writing yourself a check or initiating a transfer that withdraws money from your business account and deposits it into your personal account. This sum is not immediately taxable, so it’s important to note that an owner’s draw is not subject to payroll taxes. This income is taxable, though, so you will eventually have to pay all applicable taxes when you file your own personal taxes.

Paying a Salary

When should a business owner pay themselves? If you would prefer to have a set salary that you are paid weekly or biweekly, establishing a corporation or LLC is likely the better option for your company. Corporations and LLCs allow small business owners to have a predictable, steady income without any loss of autonomy in regards to the business. Drawing a salary ban be particularly beneficial when it comes to qualifying for personal loans, a mortgage, and other credit-dependent resources.

Managing Taxes

It’s vitally important that small business owners plan for taxes throughout the year. This is typically done by making estimated quarterly payments. Business owners should plan for their own tax debt in addition to that of their business. If you file as self-employed, you may be liable for the FICA tax on your income. This is just one general liability that business owners should be aware of come tax time. Consulting with an accountant can help you ensure that your taxes are filed and paid properly.

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