How to Pay Yourself as an Entrepreneur: Best Practices

25 June 2025

Let’s get brutally honest here—running your own business is exciting, empowering, and sometimes mentally exhausting. But it all starts to feel worth it when that sweet moment arrives: paying yourself. That’s right. You built this. You deserve to get paid!

But how do you pay yourself correctly, legally, and strategically as an entrepreneur? Do you just withdraw some cash? Do you cut yourself a check? What about taxes? Payroll? It gets a little murky.

In this no-fluff guide, we're slicing through the fog. We'll break down the different methods entrepreneurs use to pay themselves, and more importantly—how to do it smartly so you don't crash your business (or attract the IRS like bees to syrup).

Let’s roll up our sleeves and figure this out.

Why Paying Yourself Matters More Than You Think

You didn’t start your business just to hustle for free, right? Yet, tons of entrepreneurs (especially in the early stages) put off paying themselves—thinking they’re "reinvesting" in the business.

That’s noble. But dangerous. Here’s why:

- Burnout is real. If you feel broke all the time, your motivation will tank.
- Your time has value. Treating yourself like an unpaid intern sends the wrong message—to yourself and your team.
- It skews your profitability. Not factoring your compensation makes your financials look better than they are.

So yeah, paying yourself is more than just a paycheck. It’s about acknowledging your worth, staying sane, and running a sustainable business.

Step One: Know Your Business Structure

Before you can figure out how to pay yourself, you've gotta know what kind of business entity you have. This isn’t just legal mumbo-jumbo; it directly affects your payout strategy.

🏢 Sole Proprietorship or Single-Member LLC

This setup is the simplest and most common for solopreneurs.

- How You Pay Yourself: Through an “owner’s draw.” You literally just take money out of the business.
- No formal payroll needed.
- Self-employment taxes apply (yeah, they sting).

🧾 Partnership or Multi-Member LLC

If you have business partners, you split the pie—but be clear on the rules.

- How You Pay Yourself: Again, owner’s draw based on your ownership percentage (as outlined in your operating agreement).
- You’ll pay taxes on your share of the income, regardless of whether or not you take the money out.

🧍‍♂️ Corporation (C-Corp)

This setup is a whole different animal.

- How You Pay Yourself: You can take a salary AND dividends.
- Salary is a deductible business expense.
- Dividends get hit with double taxation (corporate tax + personal income tax).

🧑‍💼 S Corporation (S-Corp)

Ah, the tax saver’s dream setup (if done right).

- How You Pay Yourself: You take a “reasonable salary,” AND you can also take distributions (which are often tax-free).
- Avoids double taxation.
- The catch? You gotta be squeaky clean with payroll and tax filings.

Step Two: Always Pay Yourself From Profit—Not Revenue

Let’s clear this up once and for all: revenue is not your paycheck.

Say your business makes $100K this month. That’s not your money—yet. You’ve got:

- Operating expenses
- Taxes
- Debt payments
- Future investment needs

Your paycheck should come from profit—what’s left after covering all the necessary costs. Otherwise, you might be draining your business dry without realizing it.

Think of your business like a plant. If you pick all the fruit before the tree is strong enough, it dies. Sad metaphor? Yes. But it drives the point home.

Step Three: Decide Your Pay Method

Okay, let's talk cold, hard cash. How exactly do you pay yourself?

1. Owner's Draw

This is like you reaching into a cookie jar—but legally.

- Works for sole props, partnerships, and LLCs.
- Just transfer money from the business account to your personal account.
- Keep records, even though it's informal.

2. Salary

Think of this like a W-2 employee paycheck.

- Required for S-Corps and C-Corps.
- Taxes are withheld automatically.
- Requires setting up payroll (yes, even if it’s just you).

3. Dividends or Distributions

This is the “profit share” option.

- Usually used in S-Corps or C-Corps.
- You get a slice of the profits after taking a salary.
- Treated differently for tax purposes—often more favorable.

Step Four: Choose the Right Amount

Here's the million-dollar question: how much should you pay yourself?

Start With a Budget

You need to know your business's:

- Monthly revenue
- Monthly expenses
- Cash flow projections

Then you create categories:

1. Business reinvestment
2. Emergency fund
3. Taxes
4. Owner pay

What's a "Reasonable Salary"?

For S-Corps and C-Corps, you can't just pay yourself $1 and take massive dividends to dodge taxes. The IRS doesn’t like games.

They expect a "reasonable" salary for your role, skills, and industry.

Do some research. Look at:

- Glassdoor
- Payscale
- Industry reports

Document your reasons. If the IRS ever comes knocking, you’ve got ammo.

Step Five: Separate Personal and Business Finances

If you're still mixing business and personal accounts in 2024… stop. Just stop.

- It’s messy
- It confuses your bookkeeping
- It throws red flags at tax time

Open a dedicated business bank account. Treat it like your business roommate—you don’t share toothbrushes or bank balances.

When you pay yourself, it's a clean transfer—from business to personal. That’s how grown-up businesses roll.

Step Six: Automate and Schedule Your Pay

Would you ever forget to pay an employee for weeks? Of course not.

So don’t do that to yourself.

Set up a system:

- Pick a pay frequency (weekly, bi-weekly, monthly)
- Use accounting software or payroll platforms (like Gusto, QuickBooks, or even Wave)
- Automate transfers or direct deposits

Regular pay = predictability. And it makes your personal budget easier to manage.

Step Seven: Don't Forget the Tax Man

Here’s the part everyone hates. But taxes are non-negotiable.

Depending on how you pay yourself, you may need to:

- Withhold income taxes
- Pay self-employment taxes (Social Security + Medicare)
- Make quarterly estimated tax payments

Tip: Put 25-30% of your pay into a separate “tax account.” Just pretend it’s not even yours. Future-you will be grateful.

Also, if you’re doing payroll, some platforms can handle all tax filings automatically. Worth every penny.

Bonus Tips to Pay Yourself Smarter

We’ve covered the basics. Now here are some pro-level moves:

💰 Create a Pay Yourself First Policy

Just like you tell people to save before they spend… apply that to you. Set a fixed % of profit that goes to you before bloating expenses.

🔄 Reinvest Strategically (Not Emotionally)

It’s tempting to throw every dollar back into the biz. But reinvesting isn’t a substitute for not getting paid.

Only reinvest when there’s a clear ROI—not just because you feel like you should.

📈 Increase Pay as the Business Grows

Start small, sure. But as revenue rises—so should your paycheck. Don’t be the founder who makes less than your intern.

What If You’re Not Making Profit Yet?

Hey, we’ve all been there. The early days are rough.

If you can’t pay yourself from the business yet:

- Set a timeline: “If I don’t make X by Y, I need a side income”
- Cover basics with savings or part-time work
- Budget bare minimum for owner comp, even if it’s symbolic

You’re not a failure for not drawing a six-figure salary in year one. But you do need a plan to get there.

Final Thoughts: You Deserve to Get Paid

Entrepreneurship isn’t just a job—it’s a lifestyle, a rollercoaster, and sometimes a full-on endurance test. But here's the truth: you work too hard to barely scrape by.

Paying yourself isn’t greedy. It’s healthy. It’s necessary. It’s the foundation of building a sustainable, long-term business.

So set up the systems. Ask the uncomfortable questions. Talk to your CPA. Do the hard stuff now—so you’re not stuck in broke-founder-land a year from now.

You didn’t start a business just for stress and exposure. You did it for freedom, ownership, and yes—profit.

Time to cash in.