How to Pay Yourself as a Small Business Owner (LLC, Sole Prop, S Corp) — Complete Guide

Aug 12

If you own a small business, you’ve probably asked yourself:

“How do I actually pay myself? Do I just move money from my business account to my personal account? Do I need payroll? Am I supposed to take taxes out?”

You’re not alone. This is one of the most common questions I get from my bookkeeping and tax clients. And it’s not surprising — the answer changes depending on your business structure.

In this article, I’m going to break down exactly how small business owners can pay themselves legally, efficiently, and in a way that keeps your books clean. We’ll cover:

The differences between LLC, sole proprietorship, and S Corporation owner pay.
Two reliable methods for deciding how much to pay yourself.
Step-by-step guides for recording owner’s pay in QuickBooks Online and Wave Accounting.
Tax considerations to avoid nasty surprises at year-end.
Practical tips to keep your finances healthy while ensuring you actually get paid.

By the end, you’ll know exactly how to pay yourself confidently — and how to track it so you stay compliant and stress-free.

Why Paying Yourself Is So Confusing

When most entrepreneurs start their business, they focus on sales and getting clients. Early on, you might not have many expenses, so it’s easy to just track transactions on a spreadsheet or rely on your bank statement.

But as your business grows, money starts coming in more regularly, expenses go out at random times, and you hit this awkward point where you’re not sure which money belongs to the business — and which money is actually yours.

I’ve seen this happen to everyone from freelancers to successful content creators.

Take UK YouTuber Hannah Witton as an example. She built a thriving career making videos about sex and relationships for over a decade. After having a baby, she expanded her team — but cash flow got tricky. She found herself paying herself out of personal savings just to keep operations running. Eventually, the stress became overwhelming, and she decided to step back from her business to protect her health.

It’s a common trap: without a clear system for paying yourself, you risk burnout, financial stress, and confusion at tax time.

Here’s the truth — how you pay yourself depends entirely on your legal business structure. Get this wrong, and you could either overpay or underpay taxes, or end up with messy books that frustrate your accountant.

How Small Business Owners Pay Themselves — Big Picture

Let’s break this down by business type:

S Corporation Owners

If your business is taxed as an S Corporation, the IRS requires you to pay yourself a reasonable salary through payroll. That means:

You withhold income tax, Social Security, and Medicare — just like any employee.
You can also take extra money out of the business as shareholder distributions (profits after expenses and taxes).

Payroll can be run through QuickBooks Payroll, Wave Payroll (paid add-on), or other services like Gusto or ADP.

💡 Key point: The “reasonable salary” rule means you can’t pay yourself $5 a year to avoid payroll taxes — it needs to be in line with what someone in your role would earn in your industry.

Sole Proprietors & Single-Member LLCs

If you’re a sole proprietor or single-member LLC (and not taxed as an S Corp), things are different:

You don’t put yourself on payroll.
You take an Owner’s Draw — moving money from your business account to your personal account.
No taxes are withheld at the time of transfer — you pay taxes when you file your return (usually via quarterly estimated taxes).

How it looks in bookkeeping: Owner’s draws don’t appear on your Profit & Loss statement because they’re not an expense — they appear in the Equity section of your Balance Sheet. Think of it as moving money from one pocket to another.

Two Proven Methods for Deciding How Much to Pay Yourself

Once you know how to pay yourself based on your business type, the next question is: how much?

Here are two systems that work for most small business owners:

1. Profit First Method

This method, created by Mike Michalowicz, is a game-changer for entrepreneurs who want a predictable, sustainable way to handle income.

Here’s how it works:

Every time you get paid, immediately split the money into four accounts:
- Profit
- Taxes
- Owner’s Pay
- Operating Expenses
Each account gets a set percentage. For example:
- 40% Owner’s Pay
- 18% Taxes
- 10% Profit
- 32% Operating Expenses

Example: If you receive $5,000, you’d instantly move $2,000 into Owner’s Pay, $900 into Taxes, $500 into Profit, and $1,600 into Operating Expenses.

Mike recommends paying yourself from your Owner’s Pay account either monthly or bi-weekly. The Profit account is a bonus you take quarterly or yearly.

Why it works:

Forces you to save for taxes (no ugly surprises).
Ensures you’re profitable before spending on the business.
Scales naturally as your income grows.

2. Goal-Based Pay

If you’ve been in business for a while and want flexibility, try setting a monthly pay goal and adjusting based on performance.

How it works:

Pick a realistic monthly pay target (e.g., $3,000).
At month-end:
- Check your Profit & Loss to see net income after expenses.
- Review your Cash Flow Statement to ensure you have enough cash.
If you meet your target without draining your cushion, pay yourself your goal amount.
Keep extra profit in the business as a buffer for slower months.

Example:
If you aim for $3,000/month and your P&L shows $3,500 net income with healthy cash reserves, pay yourself $3,000 and leave $500 in the business.

Why it works:

Keeps your income predictable.
Allows flexibility for business investments or slow seasons.
Encourages you to maintain a cash buffer.

Recording Owner’s Pay in Accounting

Bookkeeping software users can record an Owner’s Draw like this:

Find the bank transaction in your feed that shows the transfer of money out of your business account into your personal account.
Click to categorize.
Select Owner’s Equity → Owner’s Draw.
Save.

It won’t appear as an expense because it’s just moving your own money between accounts.

Tax Considerations When Paying Yourself

Regardless of method, remember:

S Corp salaries have payroll taxes deducted automatically.
Owner’s Draws require you to pay estimated taxes (federal, state, and self-employment) quarterly.
Always keep personal and business accounts separate — commingling funds can cause tax headaches and legal issues.
Consider talking to a CPA or EA (Enrolled Agent) to confirm your ideal salary/draw mix.

Common Mistakes to Avoid

Not paying yourself at all — leads to burnout and messy personal finances.
Overpaying yourself — drains business cash reserves and creates tax problems.
Mixing accounts — makes bookkeeping and tax prep harder, and can pierce your LLC liability protection.
Forgetting taxes — quarterly estimates keep you penalty-free.

Which Method Should You Choose?

New business owners: Profit First is simpler and keeps taxes covered.
Established owners with cash buffer: Goal-Based Pay offers more flexibility.

Whichever you choose, commit to paying yourself regularly. Your business should support your life — not the other way around.