Paying Yourself: A Bookkeeper’s Guide to Owner’s Draws & Payroll
One of the most common questions small business owners ask is: “How much should I pay myself?” It’s a question that comes with both financial and emotional weight. On the one hand, you want to reward yourself for your hard work. On the other, you don’t want to drain your business of the cash it needs to operate and grow.
The truth is, there’s no one-size-fits-all answer. The way you pay yourself depends on your business structure, your cash flow, and your long-term goals. In this guide, we’ll walk through everything you need to know about paying yourself as a small business owner, from owner’s draws to payroll, along with bookkeeping best practices to keep things clean and compliant.
Why Paying Yourself the Right Way Matters
Many small business owners make the mistake of treating their personal and business finances as one and the same. They dip into the business account whenever they need money, without tracking how much they’ve taken out. While this might feel easy in the moment, it can create major problems:
Messy bookkeeping that makes it impossible to track profit.
Tax headaches when it’s unclear how much you’ve actually earned.
Cash flow problems if you pull too much money at the wrong time.
Limited growth opportunities because you can’t see the true health of your business.
By establishing a clear system for paying yourself, you gain financial clarity, stay compliant with tax laws, and build long-term stability.
Step 1: Know Your Business Structure
The way you pay yourself starts with your legal structure:
Sole Proprietorship or Single-Member LLC
You’ll typically take an owner’s draw.
This means you transfer money from the business account to your personal account.
It’s not considered a business expense, but it reduces the equity you have in the business.
You’ll pay taxes on your business profits, not on the draws you take.
Partnership or Multi-Member LLC
Similar to sole proprietorships, partners usually take draws.
The difference is, each partner gets a share of the profits based on the partnership agreement.
Each partner reports their share of income on their personal tax return.
S Corporation
You’re required to pay yourself a reasonable salary as an employee.
This salary goes through payroll, with taxes withheld.
You can also take additional distributions (similar to draws) after paying yourself a salary.
This structure helps reduce self-employment taxes but requires stricter bookkeeping.
C Corporation
You’ll pay yourself as a W-2 employee, receiving a salary through payroll.
You may also receive dividends, which are taxed separately.
👉 Bookkeeping Tip: Always separate payroll from owner’s draws in your records. This helps you see exactly what’s going to compensation versus reinvestment.
Step 2: Determine How Much You Can Afford to Pay Yourself
So, how much should you actually pay yourself? Here are a few factors to consider:
Profitability – Look at your net profit after expenses. If your business isn’t profitable yet, you may need to pay yourself minimally while reinvesting in growth.
Cash Flow – Do you have enough cash on hand to cover bills, payroll (if you have employees), and taxes? Don’t pay yourself at the expense of running your business.
Industry Standards – Research what other business owners in your industry pay themselves. This helps ensure your salary is “reasonable” in the eyes of the IRS (especially for S Corps).
Personal Needs – Consider your living expenses. While your business finances come first, your business should also support your personal life over time.
Taxes – Remember that draws and distributions don’t withhold taxes. You may need to set aside a percentage (often 25–30%) to cover your tax liability.
Step 3: Choose the Best Method
Here are the two primary ways to pay yourself:
Owner’s Draw
Best for: Sole proprietors, partnerships, and some LLCs.
Flexible — you can pay yourself as needed.
Simpler than payroll, but you’ll need to keep careful track for taxes.
Payroll (Salary + Taxes)
Best for: S Corps and corporations.
Provides steady, predictable income.
Ensures taxes are withheld automatically.
Adds credibility if you plan to apply for loans or credit.
👉 Pro Tip: Even if you take an owner’s draw, consider setting up a regular schedule (like monthly or biweekly transfers). This builds consistency and helps you budget personally and professionally.
Step 4: Avoid Common Mistakes
Many small business owners run into trouble by:
Taking too much money too soon, leaving the business short.
Forgetting to set aside taxes, creating a surprise bill later.
Not tracking draws in bookkeeping, which makes profit reporting inaccurate.
Paying themselves in cash without records, which can cause tax and audit issues.
A bookkeeper can help you set up a system so your records stay clean and your payments stay consistent.
Step 5: Use Bookkeeping to Stay on Track
Here’s where bookkeeping becomes your best friend:
Track owner’s equity – Know how much money you’ve taken out versus how much profit remains.
Monitor cash flow – Stay aware of whether your business can sustain your payments.
Run reports – Profit and Loss Statements, Cash Flow Statements, and Balance Sheets give you a clear picture of what you can afford.
Plan for taxes – Accurate records prevent underpayment and penalties.
Bookkeeping doesn’t just keep your records neat—it gives you the confidence to pay yourself responsibly without jeopardizing your business.
FAQs About Paying Yourself as a Small Business Owner
1. How often should I pay myself?
It depends on your structure and cash flow. Many owners pay themselves monthly, while S Corp owners often run biweekly payroll.
2. What is a “reasonable salary”?
For S Corps, the IRS requires you to pay yourself a salary that reflects what someone else in your position would earn. Too low, and it could raise red flags.
3. Can I change how much I pay myself?
Yes. Your payment should reflect your business’s financial health. If profits grow, increase your pay. If cash is tight, scale back temporarily.
Final Thoughts
As a small business owner, paying yourself isn’t just about transferring money—it’s about building a sustainable system that balances your needs with your business’s growth. Whether you take an owner’s draw or run payroll, the key is consistency, record-keeping, and planning ahead.
Bookkeeping is the foundation that makes this possible. With accurate records, you’ll always know exactly how much you can afford to pay yourself without putting your business at risk.
👉 Ready to pay yourself with confidence? At Davidson Summit Bookkeeping, we help small business owners set up clean, sustainable systems for owner’s draws and payroll. Learn more about our Payroll Support services here.