How to Correctly Pay Yourself and Take Cash From Your Business

A common question that business owners ask me is: How much should I pay myself? Maybe you have asked yourself that question too. The correct answer to that question depends on your business structure.

Sole Proprietors and Single Member LLCs

If your business is organized as such, you are not allowed to be on payroll. Instead, you take owner's draws as you need them. You report your net earnings on Schedule C of your personal tax return, which is subject to self-employment tax (currently 15.3%), in addition to income tax.

Partnerships and Multimember LLCs

If your business is organized as such, any and all partners cannot received W-2 wages. Instead, they receive:

guaranteed payments for services, taxed as income and subject to self-employment taxes or,
profit distributions, which are generally subject to self-employment taxes (except for passive limited partners).

Cash withdraws are made through partner draws or profit distributions per the partnership agreement.

S Corporations

If your business is organized as such,

you must pay yourself a reasonable salary as an employee via W-2 wages, which are subject to FICA taxes (15.3% split between you and the corporation) and,
any additional profits are taxed to you personally but can generally be distributed tax-free.

C Corporations

If your business is organized as such, the corporation pays its own taxes at a flat 21%. You as an officer can be compensated with:

W-2 wages, subject to payroll taxes and/or,
dividends, which are taxed twice - once at the corporate level and again at your personal level

If you want to discuss how your business pays your, please submit your information here and we will be in touch.

To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and it cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Seek advice based on your particular circumstances from an independent advisor.