How to Pay Yourself as a Business Owner and Save on Taxes

Posted on August 6th, 2025

 

Paying yourself as a business owner sounds simple—until taxes enter the chat.

What starts as a “just cut the check” moment quickly turns into a game of structure, timing, and strategy.

And like most things in business, how you pay yourself isn’t just about the money. It’s about how much of it you actually keep.

The way your business is set up plays a huge role in that. Sole proprietor? LLC? S Corp?

Each one comes with its own rules and tax consequences, which means the decisions you make now shape how smooth (or messy) things get later.

This isn’t about gaming the system. It’s about knowing the rules well enough to stop leaving money on the table.

So if you’re ready to figure out how to pay yourself without getting crushed by taxes, you’re in the right place.

 

Choosing the Right Business Structure for Optimal Compensation

How you set up your business has a direct impact on how you pay yourself—and how much of that money you actually get to keep.

The structure you choose shapes everything from your tax obligations to your level of control over how money moves between you and your business.

Sole proprietorships are the simplest option. You and your business are basically the same entity in the eyes of the IRS.

Income flows straight to your personal tax return, and you can pay yourself with what’s called an “owner’s draw.” The catch? Simplicity comes with a cost.

You’re on the hook for self-employment taxes on everything the business earns, and there’s no separation between personal and business liability.

LLCs offer a bit more flexibility. By default, single-member LLCs are taxed like sole proprietorships, but they give you legal separation from the business.

You can still take owner’s draws, but here’s where it gets interesting: you can elect to have your LLC taxed as an S Corporation.

That shift opens the door to a more strategic pay setup, including splitting income between a salary and distributions.

When done right, it can help cut down your self-employment tax bill—without giving up control.

Then there are corporations. C Corporations pay corporate income taxes on profits, and owners pay personal taxes on any dividends they receive—hence the “double taxation” you’ve probably heard about.

But if your business is bringing in enough revenue, C Corps can offer unique perks, like fringe benefits and tax-deductible salaries. Still, they’re best suited for specific growth goals or long-term plans—not for everyone.

S Corporations typically pass profits directly to the owners’ personal tax returns, skipping the corporate tax altogether. You’re required to pay yourself a “reasonable salary.”

But anything beyond that can be taken as a distribution, which isn’t subject to self-employment tax. That makes S Corps a favorite for small business owners looking to dial in a more tax-efficient compensation model.

Choosing the right setup isn’t about chasing the lowest tax rate—it’s about finding the right balance of simplicity, liability protection, and flexibility for how you get paid.

If your income varies or your business is growing fast, that balance matters even more. And while plenty of business owners lean toward the LLC-with-an-S-Corp-election combo, the smartest move is always tailored.

A good accountant can help map it out based on where your business stands now—and where you want it to go.

 

How to Pay Yourself and Manage Self-Employment Taxes

Once you’ve chosen a business structure, the next move is figuring out how to pay yourself in a way that doesn’t leave you crushed by self-employment taxes.

These taxes cover Social Security and Medicare, and if you're a sole proprietor or single-member LLC without S Corp status, your entire net income gets hit. No matter how you slice it, that adds up fast.

The simplicity of drawing money straight from your business account is appealing—but it comes with a cost. As profits grow, so does the chunk that goes to the IRS.

That’s where restructuring your setup or making smart use of tax-deferred tools like retirement plans can help soften the blow. You won’t dodge taxes entirely, but you can shift how much and when you pay.

Switching to an LLC with an S Corp election opens up more breathing room. Instead of paying self-employment tax on every dollar, you split your income into two buckets: salary and distribution.

The salary portion gets taxed like regular wages, but distributions skate past self-employment tax.

Just know the IRS watches this closely. That “reasonable salary” you’re required to take isn’t a guess—it needs to make sense for your role and industry.

If you’re not flying solo, things change. Partnerships and multi-member LLCs taxed as partnerships still subject your earnings to self-employment tax, but they offer more room to maneuver.

You can pull owner draws and potentially reduce your tax hit by leaning into less obvious deductions. Pre-tax healthcare contributions and retirement savings aren’t just smart—they’re strategic.

In these setups, profit splits follow whatever’s spelled out in the partnership agreement, so knowing how your distributions are structured matters.

Adding retirement plans like SEP IRAs or defined contribution plans can push even more income out of the taxable now and into the tax-deferred later.

Health Savings Accounts also earn their place in the lineup—they shrink taxable income today and keep the IRS off your back down the road when used for medical expenses.

The big idea here: how you pay yourself isn’t just about what ends up in your bank account this month. It’s about shaping a long-term approach that keeps more of your money working for you.

Partnering with a tax pro who understands these details can turn your compensation strategy into a real asset—not a recurring headache.

 

Tax-Saving Tips for Small Business Owners

Paying yourself is one piece of the puzzle. Holding onto more of that money is another.

Small business owners don’t have the luxury of automatic payroll tax withholding or built-in benefits. You have to create your own systems—and tax planning should be one of them.

One of the most effective ways to cut your tax bill is to shift income into retirement accounts.

Plans like SEP IRAs, Solo 401(k)s, and SIMPLE IRAs allow you to reduce taxable income while building long-term savings. Contributions are tax-deductible, and earnings grow tax-deferred.

The Solo 401(k), in particular, stands out for high contribution limits and flexibility, especially if you're running a one-person operation. Just make sure your contributions fit your cash flow so you're not scrambling for liquidity later.

Tax planning isn’t just about retirement, though. There are plenty of everyday ways to keep more of what you earn:

• Deduct eligible business expenses—like your home office, client meals, and work-related travel—to lower your taxable income.

• Use Section 179 to write off the full cost of qualifying equipment or software instead of depreciating it over time.

• Open a Health Savings Account (HSA) if you have a high-deductible health plan. Contributions are pre-tax, growth is tax-free, and qualified withdrawals aren’t taxed.

• Contribute to a retirement plan tailored to your business size. This not only saves on taxes but also builds long-term stability.

Each of these strategies works best with clean books and proper documentation. The IRS isn’t interested in guesses or estimates. You need receipts, logs, and a clear audit trail.

That’s where regular check-ins with a CPA become more than just smart—they're necessary. The right accountant will flag opportunities and help you stay in bounds, even as tax laws shift.

Health-related tax strategies are another often-overlooked area. Pairing an HSA with an FSA can give you even more flexibility, although FSAs come with stricter rules.

Still, used correctly, they let you set aside money tax-free for real costs you’re already paying out of pocket.

The key takeaway here: your tax plan should work just as hard as you do. That means being intentional, staying organized, and revisiting your strategy at least once a year.

With the right structure and support, you can keep more of your income without cutting corners.

 

Don't Overpay the IRS or Underpay Yourself - Get in Touch with Kingdom Tax Strategies LLC

Paying yourself as a business owner isn't just a bookkeeping detail—it's a financial strategy. How you handle your compensation can either cost you in taxes or help you hold on to more of what you earn.

The key is knowing the difference and then building a system that works with your business, not against it.

Too many business owners end up overpaying the IRS or shortchanging themselves without realizing it. Neither is sustainable.

What you need is a smarter approach to structuring pay, taxes, and benefits that aligns with your income, your goals, and your long-term vision. That’s exactly what we do.

At Kingdom Tax Strategies LLC, we specialize in helping business owners simplify complex tax decisions.

Want to know what your ideal compensation structure should look like? Book a discovery call, and let’s break it down together.

If you're ready to stop guessing and start optimizing, reach out. We’re available at (726) 600-8867 or by email at [email protected].