Profit with Purpose: How to Make Sure You’re Paying Yourself
Let’s get real for a minute, why did you start your business? Was it just to stay busy, or was it to create freedom, financial security, and a life you love?
If you said “to make money,” you’re in the right place. (And if you said “to make an impact,” guess what? You still need to make money!) Because here’s the truth: if your business isn’t paying you, then it’s time to take a closer look at what’s going on.
One of the goals of any business, especially one you’ve poured your heart into, should be to earn a profit. And when there’s profit, you deserve to be paid.
Now, how you pay yourself depends on your business structure. Let’s walk through the most common types so you can confidently move toward paying yourself regularly and sustainably.
Sole Proprietor
If you’re a sole proprietor, you and your business are legally the same. That means there’s no formal separation from a legal perspective, but for the sake of your sanity (and your books), treat your business finances like their own thing.
I highly recommend that you have a separate bank account and credit card that you use 100% for your business. It’ll make tax time so much easier, and it helps you see your business activities more clearly.
When it’s time to pay yourself, transfer funds from your business account to your personal account. Avoid using your business accounts for personal purchases, keep that boundary clean!
See blog post – Make Tax Time Less Stressful
If you’re not sure how much you should be taking out of your business as your pay, I highly recommend the book Profit First by Mike Michalowicz. This book recommends splitting any money that comes into your business into buckets – your profit (which should come out first – thus the title), taxes (so you’re setting them aside as you go), and your business operating expenses. You should be paying yourself and setting aside money for taxes first, and using the rest to cover your business expenses. Even if you don’t follow it to the letter, the mindset shift is powerful!
Limited Liability Company (LLC)
If you’re running your business as a Limited Liability Company (LLC) and being taxed as a sole proprietor or a partnership (not an S Corporation – we’ll cover that later), then you’ll take money out of the business as draws or distributions.
Just like with sole proprietorships, a separate business bank account is a must. But with an LLC, it’s not just a good habit, it’s legally required if you want to maintain your liability protection.
You’ll pay yourself by transferring money from your business account to your personal account. On your books, these are tracked as distributions and show up in the equity section of your balance sheet, not as a business expense.
And yes, Profit First applies here too. 💡 Knowing how much to pay yourself, and when, is easier when you’re working from a strategic framework.
S Corporation Election
If your business is an LLC but you’ve elected to be taxed as an S Corporation, paying yourself is a bit more structured, but the tax benefits can be totally worth it.
As the business owner doing the work, you’re required to pay yourself reasonable compensation through payroll. That means real paychecks, with proper tax withholdings like Social Security, Medicare, and state unemployment.
I highly recommend using a payroll service to process the paychecks, withhold and submit payroll taxes, and file required payroll reports. It keeps everything compliant and reduces the stress of figuring out payroll taxes on your own. I recommend using a service like Gusto, they are a cloud based service and their pricing is reasonable. www.gusto.com
“But what’s considered reasonable compensation?”
Great question! Unfortunately it’s one the IRS doesn’t give a simple formula for. Essentially, your salary should reflect the value of the work you do for the business. Think about it as if you had to hire someone else to do what you do in the business and what you would have to pay them. If your business makes $100,000 in profit, a $15,000 salary is probably going to raise some red flags.
Need help deciding? This is where a trusted tax advisor can guide you.
The bonus of being taxed as an S corp? After paying yourself a salary, you can also take additional distributions—and those aren’t subject to payroll taxes. That means savings on self-employment taxes, which are about 15% and can add up quickly when your business is thriving.
C Corporation
If your business is operating as a C Corporation, similar to the S Corporation above, you are required to pay yourself a reasonable salary as an owner-employee.
See above discussion of “reasonable compensation.” In addition, you can take money out as dividends/distributions.
But there’s a key tax difference: C corps pay taxes on their profits at the corporate level, and then shareholders pay tax again on dividends. (Yep—double taxation.) Still, C corps can make sense in certain situations, especially if you plan to grow significantly or reinvest profits.
Let Your Business Support the Life You Want
No matter how your business is structured, one thing is clear: you deserve to be compensated for your work. This isn’t about being greedy—it’s about valuing your time, honoring your role as CEO, and building something sustainable for the long haul.
You didn’t start your business to work for free. So take that step. Pay yourself. Because when you thrive, your business thrives too!