Paying Yourself as a Business Owner

When solopreneurs run payroll, it's not always clear how to pay themselves. Read the basics on how to pay yourself as a business owner.

A woman sits in her office work on plans for her small business.
Author By Roll by ADP on January 31, 2022
Reading Time 4 min read
 
 

You likely started a small business because you saw an opportunity, or because you’re passionate about your industry, or maybe because you wanted to make a difference in your community or even the world — but you still need to get paid.

Being a solopreneur is both rewarding and challenging. But when you're first getting started, it can be especially hard to know exactly how you’re supposed to pay yourself, taking taxes, withholdings, and regulations all into account.

Understanding different business structures

When it comes to paying yourself, one factor to consider is how your business is set up. While there are many different ways to set up a business, a few of the most common ways are:

  • Sole Proprietorship — With a sole proprietorship, there is no distinction between business and personal assets, expenses, or taxes. While they are easy to set up, requiring minimal paperwork or approvals, there is little protection or tax benefit.
  • Limited liability company (LLC) — While laws vary state to state, an LLC typically provides the most flexibility around corporate structure, tax payments, and legal liability. It also works to protect your personal assets in case your business fails or suffers losses in the future.
  • C-Corporations and S-Corporation — These are tax classifications which impact whether the company is taxed separately from its ownership or if income and losses are passed through shareholders. Your LLC can technically be taxed as a corporation without being registered as a legal corporation.

You should speak with a tax and business professional when deciding how to set up your business and which tax classification to use.

How to pay yourself

There are two main ways to pay yourself as a small business owner: salary or owner’s draw.

A salary is straightforward, and should be familiar. You’re paid a set amount in regular intervals, and you’d run payroll where the appropriate taxes are withheld — even if you’re the only employee.

An owner’s draw is when you take — or draw out — money from the business to use for personal expenses. This can be done at any time and for any amount. In this case, taxes are not automatically withheld so you’d have to declare it as part of your individual income when you do file your taxes.

Payroll factors to consider when paying yourself

As a sole proprietor, an owner’s draw is your only option for paying yourself as there is no distinction from a tax perspective between personal and business expenses.

If your business is an LLC and you don’t have any other employees, you’ll also need to use an owner’s draw in order to pay yourself from your business.

S-Corps allow you to easily pay yourself a regular salary, as long as it is “reasonable” according to the IRS. While it may be appealing to be especially generous with your salary, know that the more money you take out of your business — especially early on — the less you’ll have available as you grow and expand.

Just like your business is always changing, how and how much you want to pay yourself may also be in regular flux. Roll by ADP helped one small business owner do just that:

“As a consultant, I don’t have a salary, per se. Sometimes I have a gig, sometimes I don’t. But it’s so easy to make changes in Roll that I just entered my payroll as $1 and then change the amount to whatever I want when I pay myself. Even with that, running payroll only takes maybe two minutes. It’s really fast. You just say, well, this month I’m going to pay myself $2,000, and then you put in $2,000 and click “next” and it starts running. Basically, that’s it.” ~Roberto Vernon-Galindo, ChangeIT

When taking a salary or using an owner’s draw, you need to continually be aware of your current equity and cash on hand, as well as projected income and expenses in the future. But having the right payroll tool on hand can help make the whole process of paying yourself much easier.

Entrepreneurs start businesses not just because they have a great idea, but also because they want more control over the direction of the company and how money is spent. Paying yourself is an important part of that, and ensuring you do it the right way, especially early on, will help you see continued success.

Sign up with Roll by ADP today to get started, and for your first three months run payroll for free.


Business Basics • Small Business Payroll
 
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