How to Correctly Pay Yourself
A common question among business owners is how to properly pay themselves from their businesses. The correct method depends on your business structure, so I wanted to give you this quick guide to help you navigate this issue.
Sole Proprietors and Single-Member LLCs
- You cannot be on payroll. Instead, you take owner’s draws as needed.
- You report net earnings on Schedule C of your personal tax return.
- You pay self-employment taxes (15.3 percent) on self-employment net income.
Partnerships and Multimember LLCs
Partners cannot receive W-2 wages. Instead, they receive:
- guaranteed payments for services, taxed as income and subject to self-employment taxes, and
- profit distributions, which are generally subject to self-employment taxes (except for passive limited partners).
Cash withdrawals are made through partner draws or profit distributions per the partnership agreement.
S Corporations
- You must pay yourself a reasonable salary as an employee via W-2 wages, which are subject to FICA taxes (15.3 percent, split between you and the corporation).
- Any additional profits are taxed to you personally but can be distributed tax-free.
C Corporations
The corporation pays taxes at a flat 21 percent rate.
You can receive compensation in two ways:
- W-2 wages, subject to payroll taxes, or
- dividends, which are taxed twice—once at the corporate level and again at your personal level.