What’s the Right Way to Pay Yourself from Your Business?

Struggling with how much to take home, or when? Here's how to pay yourself legally, profitably, and without guilt.

"How do I actually pay myself as a business owner?"

If you've ever felt embarrassed asking this question, don't be. At Patrick Accounting, we've worked with hundreds of business owners who've wondered the same thing: 

“Can I just write myself a check?”
“Is that legal?”
“What about taxes?”

In this article, we’ll walk through the legal requirements for paying yourself, the tax implications to consider, and a framework for taking money out without guilt or surprise tax bills.

Why Your Entity Structure Matters

The answer to, "How do I pay myself?" starts with your business structure. Your entity type determines what you're legally required to do and what tax opportunities exist.

To know what rules apply to you, start by identifying your business structure.

Check your tax return:

• Form 1120: C-Corporation
• Form 1120S: S-Corporation
• Form 1065: Partnership
• Schedule C: Sole proprietorship

The Four Ways to Pay Yourself

Once you know your entity type, here’s how owners in each typically take money out… and what to watch out for.

1. C-Corporations: Must take W-2 salary. Additional profits distributed as dividends get taxed twice—once at corporate level, again personally. Rarely ideal for small businesses.
2. S-Corporations: Required to pay yourself a "reasonable salary" through payroll. Additional profits can be distributed without self-employment tax, creating significant savings. The key is balancing salary and distributions appropriately. (We cover reasonable S-Corp compensation and S-Corp vs. Partnership comparisons in detail elsewhere.)
3. Partnerships/LLCs: No payroll allowed. Take "draws" or "distributions." Just transfer money from business to personal accounts. The catch: All profit is taxable whether you take it out or not. Made $100K profit but only withdrew $50K? You're taxed on the full $100K, plus self-employment tax.
4. Sole Proprietors: Simplest method. Write yourself a check. But like partnerships, all profit is taxable regardless of withdrawals, and you'll owe self-employment tax.

How Much Should You Pay Yourself?

Three factors determine this:

1. Legal requirements: S-Corps must pay reasonable salary; this is non-negotiable.
2. Tax efficiency: Work with your accountant to structure compensation for maximum tax savings.
3. Cash flow reality: What can your business actually support? Wanting $150K doesn't help if your business only generates $80K profit.

The Reality Check: Profit Doesn't Equal Cash

Here's a common scenario: You see $100K profit on your P&L but only $50K in the bank. Where'd the other $50K go?

Let's say you borrowed money for equipment and made a $50K debt payment ($10K interest, $40K principal). You deduct the interest and depreciate the equipment, but that $40K principal payment doesn't show up as an expense on your P&L, even though you wrote the check.

Profit doesn't equal cash.

This is why cash flow understanding is critical. You must consider debt payments, equipment purchases, inventory needs, and reserves… not just your profit number.

Another reality is that growth is expensive. Revenue doubling doesn't mean you take home twice as much. Growing businesses invest heavily in equipment, staff, space, and technology before seeing returns.

The Psychology of Why Business Owners Struggle to Pay Themselves

Beyond mechanics and math, there's a psychological component we need to address.

"There's Too Much Money. This Can't All Be Mine"

Your business is doing well. Money's sitting in the bank. But you feel uncomfortable taking it out. Maybe you're worried next month won't be as good. Maybe you think you need a big cushion "just in case." Maybe you just feel guilty about profiting.

You need to realize that profit isn't greed. It's sustainability.

Without healthy profits, you can't invest in better equipment, hire quality employees, provide excellent service, or weather challenges. Paying yourself well isn't selfish. It's actually smart business.

Should you keep some reserves? Absolutely. But hoarding cash out of fear isn't strategy. It's a symptom of not having a clear plan. We've seen business owners with $350K in the bank, having already taken home $150K, still asking if they can "really" take more. Yes. That's your money. You're paying tax on it either way.

The psychological hurdle is often about getting comfortable with success. Five years ago, you made $100K, now you're making $700K. Surely that's not all yours? But if you've done the work, taken the risks, and built something valuable, you deserve to benefit.

"My Lifestyle Expanded Before My Tax Planning Did"

Here’s the other extreme: Your business has a great year. You finally feel like you're "making it." New truck. House upgrade. Nice vacation. Maybe a boat.

Then April arrives. Your accountant says you owe $60K in taxes. And you don't have it because you spent it.

We had a client who paid off his entire mortgage because he saw cash sitting there. Then came the tax conversation. His response? "I just paid off my house. Where am I supposed to get $60K?"

The problem wasn't taking money out. It was his money. The problem was not having a system for setting aside tax money throughout the year. As your business and income grow, your lifestyle naturally expands. That's fine… as long as your tax planning grows with it.

Successful business owners build systems that account for tax obligations before they start spending. They know not every dollar in the bank is theirs to spend because some belongs to the IRS.

Why the Profit First System is a Great Strategy

There's a framework that solves both the "how much" and "when" questions: Profit First. In the simplest of terms, it looks like this:

• Traditional: Income - Expenses = Profit (Whatever's left is yours)
• Profit First: Income - Profit = Expenses (Decide what you want first, then operate with what's left)

In the Profit First system, you set up multiple bank accounts with predetermined percentages. Every dollar collected gets immediately allocated to one of the following accounts:

• Profit Account (your reward)
• Owner's Comp Account (your "paycheck")
• Tax Account (no more surprises)
• Operating Expenses (what's left to run the business)

Here's an example: Collect $100K, allocate 10% profit, 10% owner's comp, 15% taxes = $65K to operate your business. That constraint forces efficiency and prevents overspending.

We've written extensively about implementing Profit First and why it works psychologically, so check into those resources for step-by-step guidance.

Three Action Steps for This Week

Step 1: Know Your Numbers

Calculate what you actually took home last year. Review last year's tax bill. Were you surprised? Check your current bank balance against upcoming obligations.

Step 2: Start Simple

At minimum, begin setting aside for taxes, even just 5%-10% of every dollar. Open a separate tax savings account. Make transfers automatic. This one habit helps prevents April panic.

Step 3: Talk to Your Accountant

If you're not having regular compensation and tax planning conversations, something's wrong. Schedule a call this week and ask: "Am I paying myself tax-efficiently?" and "How much should I set aside for taxes?"

It's Your Business, and You Deserve to Get Paid

Now that you understand the legal requirements, tax considerations, and have a framework for systematic cash flow management, keep this in mind:

You deserve to get paid for the work you're doing and the risk you're taking. Profit isn't bad. Taking money out isn't selfish. It's the whole point.

At Patrick Accounting, we don't just file taxes once a year. We help business owners create year-round strategies for paying themselves consistently, confidently, and tax-efficiently.

Ready to create a compensation plan that works? Schedule a discovery call.

Or, if you'd like a proven system behind everything you just read, Profit First is a great place to start. Read “4 Practical Tips to Implement Profit First in Your Business” for simple, actionable ways to start putting this framework to work.

You didn't start a business just to feel confused and guilty every time you need to pay yourself. You started a business to build something valuable, and that includes building a better life for yourself.