How to Correctly Pay Yourself 

Many small business owners wonder, “Should I put myself on payroll?” The answer depends on your business structure and tax considerations.

Background

The Federal Insurance Contribution Act (FICA) governs the collection of Social Security and Medicare taxes from employees and employers, while the Self-Employment Contribution Act (SECA) governs the collection of similar taxes from self-employed individuals. Under FICA, the employee and employer each pay a 6.2 percent Social Security tax and a 1.45 percent Medicare tax (15.3 percent total), while self-employed individuals pay the total 15.3 percent on defined self-employment income under SECA.

Summary: Paying Yourself Based on Business Structure

• Sole Proprietors and Single-Member LLCs:
  You typically take an owner’s draw from the business profits. These earnings are subject to self-employment tax on net income reported on Schedule C.
• Partnerships:
  Partners are not employees and do not receive wages. Instead, they receive income through guaranteed payments and profit distributions, which are generally subject to self-employment tax.
• S Corporations:
  You are required to pay yourself a reasonable salary through payroll, subject to FICA taxes. In addition, the S corporation’s profits are taxed at the shareholder level but are not subject to FICA. Distributions of these profits can be taken tax-free.
• C Corporations:
  Owners pay themselves through a reasonable W-2 salary, subject to payroll taxes, and may also receive dividends as shareholders. However, dividends are subject to double taxation—once at the corporate level and again at the individual level.