A common question among business owners is how to properly pay themselves from their businesses. The correct method depends on their business structure. Please follow the steps below to help you navigate this issue.
Sole Proprietors and Single-Member LLCs:
You cannot be on payroll. Instead, you take owner’s draws as needed.
You report net earnings on Schedule C of your personal tax return.
You pay self-employment taxes (15.3 percent) on your self-employment net income.
Partnerships and Multimember LLCs:
Partners cannot receive W-2 wages. Instead, they receive:
guaranteed payments for services, taxed as income and subject to self-employment tax, and
profit distributions, which are generally subject to self-employment taxes (except for passive limited partners).
Cash withdrawals are made through partner draws or profit distributions per the partnership agreement.
S Corporations:
You must pay yourself a reasonable salary as an employee via W-2 wages, which are subject to FICA taxes (15.3 percent, split between you and the corporation).
Any additional profits are taxed to you personally but can be distributed tax-free.
C Corporations:
The corporation pays taxes at a flat 21 percent rate.
You can receive compensation in two ways:
W-2 wages, subject to payroll taxes, or
Dividends, which are taxed twice—once at the corporate level and again at your personal level.