How to pay yourself as a small business owner

We get this question a lot: I recently started my business and I’m making a profit - how do I start paying myself? Generally speaking, the answer comes down to what type of business entity you are.⁠
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1️⃣ Owner’s Draw: If you are a Sole Proprietor, an LLC, or a partner in a General Partnership, you will be paying yourself via an Owner’s Draw. This is simply a transfer of funds between your business and personal banking accounts, whether that’s done electronically or with a check or cash withdrawal. Taxes on Owner’s Draws are not taken until you do your tax return.⁠
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2️⃣ Distribution: S Corps or LLC’s taxed as an S Corp take what’s known as a Distribution. This is exactly the same as an Owner’s Draw but since corporations have shareholders, not owners, the term Distribution is used. Although you will be paying some taxes through payroll (more info about this below), plan to also pay taxes on your income on a quarterly basis. Your bookkeeper or CPA can help you determine how much to pay.⁠
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3️⃣ Payroll: If you are an S Corp, or an LLC taxed as an S Corp, all shareholders must also be on payroll. The major advantage to being an S Corp (or taxed as one), is that you do not pay Self Employment tax. Because of this, however, the IRS requires shareholders to pay themselves a “reasonable salary” which is subject to Social Security and Medicare taxes. Your bookkeeper or CPA can help you determine what portion of your income should be paid via payroll vs distributions.⁠
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