How to Correctly Pay Yourself and Take Cash from Your Business

A common question among business owners is how to pay themselves from their businesses properly. 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

• profit distributions, which are generally subject to self-employment tax (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

• dividends, which are taxed twice—once at the corporate level and again at your personal level