How to pay yourself from your business as a sole proprietor: move money from the business account to your personal account as an owner's draw, usually once or twice a month. It is not a salary. Take what is left after setting aside tax and a cash buffer, and record each transfer as a draw, not an expense.
How does a sole proprietor pay themselves from the business?
A sole proprietor pays themselves with an owner's draw: a plain transfer from the business bank account to a personal account. There is no payslip and no withholding. The business and the owner are the same taxpayer, so the draw is just you moving your own money from one pocket to another.
That is also why the draw is not a deduction. The IRS page on paying yourself says how owners are paid depends on the business structure you choose. For a sole proprietor, tax is worked out on the business's profit, whatever you transferred. Take nothing all year or take every dollar: the profit, and the tax on it, is the same.
The mechanics take a minute. Set up a transfer in online banking from the business account to your personal one, with a memo such as "Owner draw October". The IRS guide for new businesses, Publication 583, suggests writing checks to yourself only when you withdraw money for personal use, which is the same habit: keep personal spending off the business account and move money across in clear, labelled amounts.
How much should your owner's draw be each month?
A safe owner's draw is last month's profit, minus a tax set-aside, minus whatever the business account needs to rebuild its buffer. Profit is income received less expenses paid. The buffer is a cushion of one or two months of business costs that stays in the account so a slow month does not leave a bill unpaid.
Here is a worked example for one month. The figures and the set-aside rate are examples, not advice for your situation.
- Income received in September: 6,400.00.
- Business expenses paid in September: 1,400.00.
- Profit: 6,400.00 − 1,400.00 = 5,000.00.
- Tax set-aside at an example rate of 25%: 1,250.00, moved to a separate savings account.
- Buffer target of 2,000.00, current buffer 1,750.00, so 250.00 stays in the account.
- Owner's draw: 5,000.00 − 1,250.00 − 250.00 = 3,500.00.
Two habits make this easier. Use the same day each month, so the draw follows the profit you have already seen rather than the profit you expect. And keep the number boring: if one month is unusually good, take a normal draw and let the rest sit until you know the next month is fine.
The profit figure comes from your own records. If you do not track costs yet, tracking business expenses for free sets up the list, and a small business budget template helps you plan a steady draw from last year's numbers.
Setting aside self-employment tax before the draw
Self-employment tax is the Social Security and Medicare tax a sole proprietor pays on business profit, on top of income tax. Because no employer withholds it, you set the money aside yourself before taking a draw. Skipping that step is how a good year turns into a tax bill you cannot pay.
The IRS page on self-employment tax gives the rate as 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare, and says you generally owe it once net earnings from self-employment reach $400. Income tax comes on top of that. The same page notes that self-employed people may need to make quarterly estimated tax payments and can use them to pay this tax.
That is why the example above sets aside a quarter of profit rather than 15.3%. The right figure for you depends on your income, deductions and state, so ask a tax preparer once and then use the rate every month. Keep the set-aside in its own savings account, not the business checking account, so it is never mistaken for spare cash.
How an owner's draw shows on the business bank statement
An owner's draw shows on the business bank statement as one outgoing transfer, usually described as "Online transfer to checking" or "Transfer to" followed by your personal account's last digits. On your personal statement the same amount appears as an incoming transfer on the same or the next day.
In your books, give that row its own category, "Owner draw", and keep it out of the expense totals. If it ends up as an expense, your records show less profit than you really made, and anyone reading them, including you at tax time, gets the wrong figure. The tax set-aside transfer gets the same treatment under its own name.
A quick monthly check confirms the draws are clean. Filter the business statement rows by the Owner draw category. You should see one or two transfers a month, each matching your plan. Card purchases at a supermarket in that list mean personal spending crept onto the business account.
If your statements are paper, or the PDF will not copy cleanly, scanning bank statements into Excel shows a way to get the rows into a sheet. CheapBankConvert, not yet open, is aimed at the PDF case: one statement in, a CSV or Excel file out, paid once; see the price per statement.
Owner pay in an LLC taxed as a corporation, or a partnership
The owner's draw method fits a sole proprietor and a single-member LLC taxed like one. It does not fit every structure. An owner of a business taxed as a corporation who works in it is generally paid wages through payroll, and partners are paid through distributions or guaranteed payments rather than wages.
The IRS paying-yourself page says partners should not receive a Form W-2 for those payments, and that you cannot decide whether someone, including yourself, is an employee simply by choosing which form to issue. Corporate officers who perform services are generally treated as employees, with payroll taxes withheld.
If you have formed an LLC and are unsure how it is taxed, find out before the next transfer. The answer decides whether a transfer to yourself is a draw, a distribution or a paycheck, and each one is recorded differently. A one-time conversation with a tax preparer costs less than correcting a year of payments later.