Summary of What This Blog Covers
- How you pay yourself depends on your business structure.
- Salaries are required for S-Corps and C-Corps.
- Owner’s draws offer flexibility but require tax planning.
- Distributions can reduce taxes if used properly.
Salary, Draw, or Dividends, Let’s Talk About Getting Paid With Intention
Let’s just pause for a second and acknowledge something: if you’re asking this question, you’ve already crossed an incredible milestone.
You started something. You grew it. And now? It’s making money.
That’s not luck. That’s leadership. That’s showing up for your vision day after day, through the messy middle and the what-do-I-do-next moments. So if you’re wondering how to actually pay yourself truly and sustainably, you’re not behind. You’re on the brink of leveling up.
Because this moment right here? This is when your business stops being a hustle and starts becoming an engine for personal freedom.
The question now is: how do you pull money from your business in a way that’s financially smart, tax-compliant, and aligned with your growth goals?
There are a few ways to do it and each one comes with its own rhythm, tax impact, and potential.
Whether you’re running a sole proprietorship from your living room or scaling an S-Corp with six-figure revenue, the way you pay yourself matters more than most business owners realize. This is about more than cash flow. It’s about creating a system that supports the life you’re building without getting clobbered by taxes or caught off guard by compliance rules.
So let’s dig in. You’ve got questions, and we’ve got answers served with a side of clarity, strategy, and let’s-make-this-simple energy.
First, Let’s Set the Stage: Your Business Entity Matters
Before we dive into the three main ways to pay yourself, there’s one important factor we need to call out: your business structure.
How your business is legally and tax-wise set up (sole proprietorship, LLC, S-Corp, or C-Corp) affects everything about how you’re allowed to pay yourself, how much flexibility you have, and what taxes you’ll owe.
This isn’t red tape. It’s a roadmap.
And here’s the beautiful thing: when you choose the right compensation structure for your business type, you don’t just get paid. You get strategic. You start playing the game in a way that keeps more money in your pocket, fuels your growth, and protects your business long-term.
So if you’ve been Googling “tax preparer near me” or “Austin, Texas CPA” trying to figure this out, breathe easy. You’re exactly where you need to be.
Now, let’s explore the three main ways business owners get paid: Salary, Owner’s Draw, and Dividends or Distributions.
1. Salary: Predictable, Powerful, and Professionally Essential
Let’s start with the one that feels the most familiar.
A salary is what most of us grew up with. Every two weeks (or every month), your employer deposits money in your bank account, and behind the scenes, they’ve already withheld taxes for things like Social Security, Medicare, and federal income tax.
When you’re a business owner—especially if you operate as an S-Corp or C-Corp—this structure becomes more than convenient. It becomes required.
That’s right. If you work in your business and it’s taxed as an S-Corporation or a C-Corporation, you must pay yourself a salary that reflects the value of the work you’re doing. This is called “reasonable compensation,” and it’s an IRS mandate.
And while that might sound like a hassle, it’s actually an opportunity. Because salary gives you consistency, a clean paper trail, and the ability to deduct wages from your business income, a huge win come tax time.
Why a Salary Makes Sense:
- It helps with personal budgeting, loan applications, and financial planning.
- Withholding happens automatically, so your taxes are covered as you go.
- The salary becomes a deductible business expense, lowering your company’s taxable income.
- It keeps your business IRS-compliant, especially important if you’re taking additional profits in other forms like distributions.
But here’s the part most business owners miss: how much should you actually pay yourself?
Too little, and the IRS could reclassify your distributions as salary and back-charge you for unpaid payroll taxes. Too much, and you’re giving the government more than you need to in payroll taxes.
At Insogna, we use market data, role analysis, and business health indicators to help you set the right number. We walk you through industry averages, revenue-to-compensation ratios, and long-term financial forecasts to make sure your salary is both compliant and smart.
2. Owner’s Draw: Flexible, Simple, and Popular for Early-Stage Businesses
If you’re a sole proprietor or a single-member LLC (and you haven’t elected to be taxed as an S-Corp), chances are you’re taking an owner’s draw.
And let’s be real, this method feels intuitive. You built the business. The business is making money. So, when you need to pay your rent, buy groceries, or fund that weekend away, you just transfer funds from your business account to your personal one.
Simple. Fast. Empowering.
But beneath that simplicity is a layer of tax complexity that catches many entrepreneurs off guard.
Here’s what most people don’t realize: when you take an owner’s draw, you’re not avoiding taxes, you’re just deferring them. Every dollar you take out is still fully taxable as self-employment income, which means a 15.3% tax rate right off the bat (to cover Social Security and Medicare), plus whatever income tax rate applies to your earnings.
And because draws don’t come with automatic tax withholding, it’s up to you to calculate, set aside, and pay quarterly estimated taxes or risk penalties and interest.
At Insogna, we help clients build a “draw plan” that matches their real income cycles. We calculate the right percentage to set aside, automate savings transfers, and set up estimated tax schedules so you can keep the freedom of draws without the tax drama.
Why Owner’s Draws Work:
- They’re flexible and easy to execute.
- You don’t need to run payroll.
- Ideal for businesses with variable revenue months.
Where They Can Go Wrong:
- No tax withholding = high tax bills if not planned for.
- Inconsistent withdrawals can cause cash flow issues.
- Without clear structure, it’s hard to plan for investments or personal financial goals.
3. Distributions and Dividends: Your Ticket to Tax-Efficiency (When Done Right)
Let’s talk about distributions (S-Corps) and dividends (C-Corps). These are the payments you take from business profits after your salary is paid (if one is required).
And here’s where things get juicy.
S-Corp owners, in particular, have a tax advantage built right in. Once you’ve paid yourself a reasonable salary, any additional profits you distribute to yourself are not subject to self-employment tax. That 15.3%? Gone. That’s real money saved.
This is what we call a tax-efficient strategy, and it’s one of the most valuable parts of S-Corp ownership if it’s executed correctly.
For S-Corp Owners:
- Take a salary that’s reasonable based on role and revenue.
- Take additional profits as distributions, no self-employment tax applies.
- Keep payroll and bookkeeping clean to stay compliant.
For C-Corp Owners:
- Dividends are paid from after-tax profits.
- Be aware of double taxation—the corporation pays tax on profits, then shareholders pay again on dividends received.
- Dividends may be worth it for investor-backed or long-term retained earnings strategies.
But a word of caution: some business owners try to skip salary entirely and only take distributions. Don’t do it. The IRS watches this like a hawk, and reclassifying all distributions as salary is a fast-track to penalties.
With guidance from a team with licensed CPAs in Austin, Texas, you can craft a hybrid strategy that maximizes tax efficiency while staying within IRS rules. We model these approaches side-by-side so you can see the true financial impact of each choice.
So… Which Method Is Right for You?
The honest answer? It depends on your business entity, your revenue, your goals, and your appetite for structure.
That’s why our first move with every client is to run the numbers, clarify their business type, and map their goals before recommending a strategy.
But here’s a general guide to get you started:
If You’re a Sole Proprietor or Traditional LLC:
- Take owner’s draws.
- Set aside 30–40% of income for taxes.
- Consider S-Corp election if net income exceeds $50K/year.
If You’re an S-Corp Owner:
- Pay yourself a salary.
- Take additional profits as distributions.
- Balance both with help from a tax pro to avoid overpaying.
If You’re a C-Corp Owner:
- Take a salary through payroll.
- Consider dividends based on long-term strategy.
- Be prepared for double taxation, but it might still be the right fit in some cases.
Let’s Be Real, This Is Bigger Than Just Getting Paid.
The way you pay yourself is about more than tax forms and paycheck stubs. It’s about building a business that fuels your life, not just funds it.
It’s about being intentional, informed, and in control. Because when your income system is set up properly, it frees you to focus on what actually grows your business: innovation, service, and impact.
And at Insogna, we don’t just file your taxes. We help you build the financial architecture that supports your vision for years to come.
We’re not the cheapest option. And we’re proud of that. Because our clients aren’t looking for generic, they’re looking for exceptional. They want guidance they can trust, strategies that actually work, and a team that’s as invested in their success as they are.
So whether you’re paying yourself for the first time or reworking your current strategy, we’re here to help you do it with confidence.
Ready to Pay Yourself the Right Way?
Let’s structure your income so it aligns with your business structure, protects your cash flow, and builds long-term wealth.
Contact Insogna, your trusted tax advisor in Austin, serving clients across Texas and the U.S., and let’s make sure every dollar you earn moves you forward.
Book your personalized consultation now and experience what a premium team of CPAs can do for your business.