New business owners in Midland ask this within their first few months: how do I actually pay myself? Some write themselves a paycheck from day one. Some just move money to their personal account whenever the business account looks healthy. Some do neither and live off the business card. Only one of these approaches is right for any given business, and which one depends on how the business is taxed, not on what feels natural.
Sole proprietors and single-member LLCs: the draw
If you are a sole proprietor, or a single-member LLC that has not elected to be taxed as a corporation, you and the business are one taxpayer. The business's profit is your income whether you move it to your personal account or not. So you do not pay yourself a salary. You take an owner's draw: a transfer from the business account to your personal account, recorded in the books as a draw, with no withholding and no payroll forms.
The tax on that profit is paid through quarterly estimated payments, and it includes self-employment tax on the whole net profit regardless of how much you drew. Drawing less does not lower the tax. Putting yourself on payroll as a sole proprietor is actually an error; the IRS does not treat an owner of a disregarded business as an employee of it.
Partnerships and multi-member LLCs
Partners also take draws, called distributions, and the partnership can additionally pay a partner a guaranteed payment for services, which is reported separately. Partners are not employees either. Each partner pays self-employment tax on their share of the profit.
S corporations: salary first, then distributions
An S corporation, or an LLC that has elected S corporation treatment, is different. An owner who works in the business is an employee of it and must be paid a reasonable salary through payroll, with W-2 withholding, before taking any distributions. Profit left after that salary passes through to the owner without self-employment tax, which is the whole reason people make the election.
- Reasonable means what you would have to pay someone else to do your job. Paying yourself a token salary and taking everything else as distributions is the pattern the IRS looks for.
- The salary requires real payroll: quarterly 941s, deposits, a W-2 in January, and Texas unemployment tax filings.
- Distributions are taken after payroll, from profit, and are not subject to withholding.
An S election is worth it only when the business earns enough above a reasonable salary for the payroll-tax savings to exceed the cost of running payroll and filing a separate corporate return. Below that line it is extra work for no benefit. We run the numbers before recommending it.
Whatever the structure, do these
- 01Pay yourself on a schedule, from the business account to the personal account, and record every transfer. Random transfers are the hardest thing to reconstruct at year end.
- 02Never pay personal expenses from the business card. Pay yourself, then pay the expense.
- 03Set aside tax from every draw or distribution. A separate savings account that receives a fixed percentage of each transfer prevents the April surprise.
- 04Reconcile the draw account at year end so the return matches the bank.
Frequently asked questions
Can I deduct my own draw as a business expense?
No. A draw is not an expense; it is you taking profit that has already been taxed as yours. A salary from an S corporation is a deductible expense of the corporation, but it is then taxable income to you.
I took draws but the business shows a loss. Do I owe tax?
For a sole proprietor, tax follows profit, not draws. A genuine loss produces no self-employment tax and may offset other income. The draws came from capital or borrowed money, which is a different problem.
How much should I set aside for taxes from each draw?
It depends on your bracket and your other income. We give clients a percentage after looking at their situation rather than a number that fits everyone.
Set it up right once
Bring your formation documents and a recent bank statement and we will tell you which method applies and set up the payroll if you need it. Call (432) 257-7547 or come by 700 C Andrews Hwy in Midland. English and Spanish.
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