How to Pay Yourself As A Small Business Owner?

• Reading Time: 7 Minutes
• Published: December 23, 2022
• Last Updated: January 16, 2025

With all the hard work you put into your business, you expect a return for the same, but do you know the right method to pay yourself? Taking money out of your business for yourself can be quite complicated sometimes. You must follow the right approach and withdraw a right and reasonable amount to stay in compliance with the regulations and company policies. You can choose accounting outsourcing to help you make the process easier and more accurate. They can help you choose the right method for paying yourself per your business’s model and status while ensuring you comply with the relevant laws and regulations. If you are curious about how you should pay yourself, keep reading to learn more about the different payment methods and which one is best for you.

Methods to Pay Yourself

When it comes to small business owners paying themselves, there are three methods that you can choose from, namely: the salary method, the draw method, and dividend payments. Let us know more about these methods.

• Salary method-

Under this method, you have to set up your pay, and that amount is paid to you regularly as a salary like the other employees of your business. The amount is fixed, and the taxes are deducted from the salary upfront. This method is considered better as it is more stable and recurring.

• Draw method-

The draw method means the business owner can draw money from the business regularly or whenever needed. This method is more flexible as you can withdraw more when your business is profitable and less during slow growth periods. The funds withdrawn under this method are flexible at the end of the year.

• Dividend payment-

You can also pay yourself dividends from your business. However, a dividend is considered investment income and not personal income. Dividends are paid to business shareholders, and it is an easy process. The business declares dividends, which are then transferred to the shareholder’s personal account. However, in practice, the small business owner withdraws the amount as required, which is then declared as a dividend once a year.

How to Pay Yourself based on Different Types of Businesses?

Though there are different remuneration methods that you can follow as a small business owner, not every method suits every business structure. You must choose the right payment method to get the right payment while ensuring compliance with the rules and regulations related to the relevant business and industry. Understanding and following all the requirements is a complicated task, and it will be difficult for you to manage it on your own and require expert advice. Taking help from small business advisory services providers with expertise and experience managing these things can be helpful as they are also impartial towards the business dealings. Let us know which type of remuneration is most suitable for you per the business structure.

1. Sole proprietorship:

Since sole proprietorship is a business structure where the business owner is not separate from the business, the draw method is preferable.

2. Partnership:

Like sole proprietorships, the business owners are personally liable for the business’s finances in partnerships. The amount withdrawn from the business is divided between the business partners. Here also, the best way to pay yourself as a business owner is through the draw method.

3. Limited Liability Company (LLC):

LLC is a type of business that can have a single member, like a sole proprietorship, or multiple members as a partnership or corporation. If you are the owner of a single-member LLC, you can pay yourself with the owner’s draw method. In case your LLC is multi-membered, the payment method changes per the business structure. The partnership LLC allows its business owners to pay by the draw method. However, the method changes for the corporation LLC. Here the business owners are shareholders, and they can pay themselves in the form of salary. The draw method is not suitable for corporation LLC business owners. In addition to salary, they may also take dividend income, and the amount they can take as their payment is mentioned in the articles of incorporation.

4. Not-for-Profit (NFP):

NFPs are tax-exempt businesses set up for a social cause or to promote a common point. As an NFP owner, you can pay yourself via the salary method. The remuneration should be reasonable and validated by an authorized third party. You must follow the strict reporting rules regarding the draws you can make as a business owner. Frequent draws are not recommended.

5. S-Corp:

As an S-Corp business owner, you pay yourself in the form of a salary, and the payment must be equivalent to an employee’s earnings in the same industry for comparable work. Here you don’t get the owner’s draw. You can, however, take distributions in addition to your regular salary. However, you can’t take distributions only. Distributions can be made in the form of cash or stocks. You must also follow the rules regarding the limitations of distributions you can make from your business.

6. C-Corp:

You can pay yourself a salary for your efforts as a C-Corp business owner. The salary must be reasonable and comparable to the same industry employees doing similar work. You can pay yourself more on top of the salary in the form of dividends.

Useful read: “S Corporation vs. C Corporation: Know the differences and similarities”

What Should You Avoid While Paying Yourself?

One of the most common mistakes business owners make while paying themselves is having one account for personal and business use. Maintaining a separate personal and business account is a common practice and is also required by law in many cases. It is a simple process with small adjustments and offers many perks for you and your business. It helps you build a credit score for your business and enhance your tax efficiency. Some more benefits of having a separate personal and business account include:

• Better organized bookkeeping
• Efficient tax returns
• Clear audit trails
• Better cash flow management
• Builds business credibility
• Enhances business credit score

How Can Accounting Outsourcing Help?

Using an outsourced accounting services provider to pay yourself as a business owner is better than managing it on your own or with the help of the in-house accounting team. It makes the process hassle-free as the outsourcing services providers have teams of trusted, reliable, expert, and experienced personnel to manage your payroll. They ensure the process is managed thoroughly and diligently and that the labor laws and tax codes are followed. Small businesses specifically benefit from accounting outsourcing as you have limited resources and money to spend on every business process. You can also save significant time and other overheads that will otherwise be required for an in-house accounting team.

Conclusion

Based on the discussion above, we can conclude that as a small business owner, you also need to pay yourself for all the difficult work and time you put into your business. However, you must ensure the payment is made via the right method and is reasonable to ensure legal and regulatory compliance. Though you can manage the process in-house, choosing accounting outsourcing has more perks. You just have to choose the right service provider for the best results. You can contact us to get business advisory services, wherein we will analyze your business and guide you with the best method for paying yourself. Make the right choice at the right time and reap maximum benefits for your business and yourself.

Save More, Do More With Smart Accounting!

Get customized plan that supports your growth

Explore Pricing!