Reader Question: How Do Business Owners Pay Themselves

By Ben Szweda

Reader question:
“When should I start to pay for my time as a bookkeeper or my husband’s time as a tech? We have a full-time tech, but sometimes one of us needs to help out. Is there a way to account for the payment without actually taking pay? Trying to keep money in business.”

Marsha | Cleveland, OH

Thank you to Marsha who sent this question in via the networking website Alignable

While there isn’t enough information in the question to definitely provide an answer, we will look at the various options available for owner compensation. How you as a business owner should compensate yourself depends on how your business is structured. 

a person doing calculations using a calculator in his desk office

Types of Business Structures

Disregarded Entity | Sole Proprietor | Schedule C Filer | Self-Employed 

If you are operating a business simply using your social security number your business falls into the category of a sole proprietorship. If you have formed an LLC and both of the following statements are true, your business falls into the single-member LLC category. Statement One: You are the only owner (i.e., member) of the LLC (i.e., you have no partners). Statement Two: You have not chosen to be taxed as an S-Corporation.   

Both sole proprietorships and single-member LLCs are treated by the IRS as a “disregarded entity.” If you’re still not sure if this is you, dig out your tax return from last year and if you find a Schedule C tax form, this is the category you fall into. 


If you add additional business owners (i.e., members or partners) to your business you then become a multi-member LLC and will automatically be treated as a partnership by the IRS. 


An LLC is treated as an S-Corporation if it has elected to be taxed as such by filing IRS Form 2553. Such businesses submit IRS Form 1120S. Owners of such a business entity are considered employees of the business. There can be both single-employee-owner S-Corporations and multi-employee-owner S-Corps. 

Paying Yourself In a Disregarded Entity or Partnership

Business owner paying himself on his computerIf your business falls in this category you pay yourself via what are called owner draws. This can be accomplished by transferring money from your business bank account to your personal bank account or by writing yourself a check from your business bank account. 

While pay stubs make things like buying a house and proving your income easier, company owners of partnerships and sole proprietorships cannot pay themselves via formal payroll services. If you have been doing this through maybe Square or QuickBooks Online Payroll reach out to your accountant for help right away. 

Accounting for the Draw

In Marsha’s question, she also asked about a way to account for the payment without actually taking it. It sounds like Marsha would like a more accurate P&L that would record her “wage expense” as an expense. 

Unfortunately, business owners’ draws do not get recorded to the P&L as they are not an expense of the business. Owner draws are booked to the very bottom of the balance sheet in the equity section. The journal entry for such a transaction would require a debit to the owner’s draw account and a credit to cash.

Paying Yourself in an S-Corporation

Per the IRS, employee-owners (i.e., shareholders) must be formally hired by the business and placed on the payroll as an employee. Shareholders cannot be paid in draws. 

Once on formal payroll, you will receive a W2 at the end of the calendar year from the payroll processing company. Each paycheck will also see employer and employee taxes being paid to the federal government, and depending on what state you live in, state and city taxes too.

Accounting for Payroll

Szweda Consulting, LLC, processes payroll for many of its clients. We do this using the technology of the Gusto platform which we highly recommend. This software seamlessly integrates with QuickBooks Online and automatically records the necessary entry to put the payroll expense (wages and taxes) on the company’s P&L right where it belongs, every time. 

If you are interested in having your LLC taxed as an S-Corporation or if you need help setting up formal payroll for your S-Corp, please reach out to us for help.  If you have a question you’d like to see answered here on the blog, click here to submit your question. 

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