This question sounds simple but it trips up more business owners than almost anything else. Here's how it works by entity type.
Sole Proprietor / Single-Member LLC:
You take owner draws. There's no payroll, no W-2. You just transfer money from your business account to your personal account. Document it as an owner draw. You'll pay self-employment tax on your net profit regardless of how much you actually take.
S-Corporation:
This is where it gets specific. You MUST pay yourself a "reasonable salary" first—W-2 wages with payroll taxes withheld. What's reasonable? Depends on your role and industry, but the IRS looks for what you'd pay someone else to do your job. After salary, you can take additional profits as distributions (not subject to payroll tax).
C-Corporation:
You're an employee. You receive W-2 wages. Any additional compensation (bonuses, dividends) has specific tax treatment. Most small businesses aren't C-Corps, so I won't go deep here.
The mistakes I see constantly:
1. S-Corp owners taking all distributions, zero salary. The IRS hates this. Audit risk is high.
2. Not setting aside money for taxes. If you're a sole proprietor, 30-35% of profit should be earmarked for taxes.
3. Co-mingling funds. Keep business and personal accounts separate. Always.
The practical advice:
Set up a simple system:
- Pay yourself on a regular schedule (weekly, bi-weekly, monthly)
- If S-Corp: run actual payroll, even if it's just you
- Set aside estimated taxes quarterly—don't wait until April
If your business cash flow is inconsistent, this gets harder. That's where cash flow planning becomes critical, and frankly, where having someone help you is worth it.
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