How to Pay Yourself As a Sole Proprietor

Getting paid when you work for yourself isn’t as simple as it may seem. Sole proprietors can follow these guidelines for paying themselves in a way that doesn’t land them in trouble with the IRS or other government agencies.

How do you pay yourself when you’re self-employed and haven’t incorporated your business? It ought to be simple, right? You sell something or do a service and get paid for it. That’s how self-employment works for freelancers, consultants, independent contractors, and other self-employed people, right?

If only it were that simple. When you’re self-employed, you’re running a business. That means you have to pay taxes on your income and abide by certain rules. For tax purposes, if you haven’t incorporated or formed an LLC and are the only owner of the business, the form of business you are operating under is called a sole proprietorship. 

As a sole proprietor, you don’t pay yourself a salary and you can’t deduct your salary as a business expense. Technically, your “pay” is the profit (sales minus expenses) that the business makes at the end of the year. You can hire other employees and pay them a salary. You just can’t pay yourself that way. The same rules for paying yourself in an LLC apply if you operate the LLC as a sole proprietorship or general partnership

You don’t have to wait until the end of the year to withdraw your profits, though. To pay yourself when you need money during the year, you take what’s called a draw on the profits. Taking a draw simply means taking money from the business account and giving it to yourself. You could take out cash or write yourself a check. You can do it once a week, once a month, or randomly, as needed.

How does that differ from just taking money customers pay you and putting it into your personal checking account? Technically, you could do that. But it’s not wise. You’re going to need detailed, accurate records of your business income and expenses when you file your taxes.

Am I a sole proprietor?

Before you can start paying yourself and paying taxes, you need to be sure you understand what a sole proprietor is. According to the IRS, “a sole proprietor is someone who owns and operates an unincorporated business by himself or herself.” The business can have a name that’s different from your given name (or not — that’s up to you).

But even when the business has a distinct name, if you’re the only owner and haven’t incorporated the business, all the profits from the business pass through to you and are reportable on your personal income tax forms. You report the year’s profits (or losses) from your sole proprietor activities on IRS Schedule C, which gets included with your personal tax return, and pay income taxes accordingly.

As a sole proprietor (or self-employed individual), you’ll need to pay federal, state, and possibly local income taxes on all the profits and ensure you pay income tax accurately based on your business earnings. You’ll also need to pay self-employment tax deductions. (The self-employment tax is basically Social Security and Medicare taxes for the self-employed.) Since your “salary” when you are self-employed is actually the profit from the business, the self-employment taxes are calculated on the business profits.

Separate personal and business finances with a business bank account

As a business owner, you’ll need to keep accurate records of your income and business expenses. Doing that will be extremely difficult if you put all your business earnings into the same account you use for personal expenses. Commingling business funds with your personal account may also make it more difficult to prove expenses were strictly for business if they look like personal expenses.

To keep things simple for yourself, your accountant, and the IRS, open a business bank account to start (you can get a business bank account through ZenBusiness). If you aren’t using a business name, open the account in your own name, but be sure to use it only for the business. If you are using a business name (for example, Joe’s Clam House), the bank will usually require a copy of a DBA (“doing business as”) certificate (a certificate saying you’re doing business under a fictitious name) or a business license report, or both. (Check with your bank to find out what they’ll need. Some banks may require a DBA certificate for a business even if the business “name” is your name.)

Use this business account to deposit all income from the business. Checks, ACH deposits, credit card sales receipts, and any other income should all be deposited into this account. Pay all the business bills from this account, as well. Your bank statements, along with records you keep about income and spending, will give you and your accountant a clear picture of how much the business earned, how much it spent, and what its profits are. If there’s a business name on the account, it will also help your business look more established to customers.

If your business is home-based, consider a separate phone line for your business. You’ll be able to deduct the entire cost of the business phone — plus, you can then answer all calls with your business name so you sound more professional.

If you’ll be charging any business expenses, get a separate charge card for use by the business. Chances are the credit card will be issued in your name, not the business’s name, or if the business name is on the card, yours will be, too. Use this credit card only to buy products or services for your business. Don’t make any personal purchases with the card. That way, you’ll know that everything charged to that card is for the business.

Use an accounting program to record all the deposits and withdrawals from the business checking account. Use the accounting program to characterize the nature of the expenses as you pay them (for example, website hosting, office supplies, accountant’s fees, etc.) Doing so will let you see at any time what your profit (or loss) is. Tracking expenses like this in your accounting program will also make it much easier at the end of the year to categorize your spending for tax purposes. It will also help you budget for the next year and analyze your spending patterns.

Paying Yourself

As a sole proprietor, you can pay yourself whenever you want (and the business income allows). Ideally, you’ll do this on a regular basis. When you do pay yourself, you just write out a check to yourself for the amount of money you want to withdraw from the business and characterize it as owner’s equity or a disbursement. Then, deposit the check in your personal checking or savings account. Using tools like a pay stub generator can also help you track income accurately.

Remember, this is “profit” being withdrawn, not a salary. Therefore, no income taxes, Social Security, or Medicare comes out of your check. But you will have to pay all those taxes when you file your personal tax return, so remember to set aside money to cover the expense. Once the business is profitable, you’ll be paying these amounts quarterly in the form of estimated taxes. But, in your first year of business, you may not have to pay anything until you file your annual return.

If you have expenses that will ultimately be shared between personal and business accounts (for example, the cost of Internet use if your home business tax deductions uses the same Internet connection the family does), those costs won’t get recorded in your accounting program. You’ll calculate them at the end of the year when you prepare your taxes and take a deduction for them on the Expenses for Business Use of Your Home form.

Maintaining a Healthy Business

Maintaining a healthy business requires ongoing effort and attention. This includes regularly reviewing your business finances, identifying areas for improvement, and making necessary adjustments. Staying up to date with changes in your industry and adjusting your business strategy accordingly is also vital for long-term success.

Equally important is prioritizing your personal well-being. Managing stress and avoiding burnout are crucial for maintaining both personal and business health. Consider delegating tasks, taking regular breaks, and seeking support from colleagues, mentors, or professionals. By focusing on both your personal and business well-being, you can help ensure a healthy and sustainable business that thrives over time.

Managing your finances as a sole proprietor requires careful attention to record-keeping, tax compliance, and maintaining a clear separation between personal and business finances. By understanding how to pay yourself through owner’s draws, keeping accurate financial records, and staying on top of your tax obligations, you can set your business up for long-term success. While the process may seem daunting at first, adopting sound financial practices and seeking professional advice when needed will help you maintain a healthy business and avoid common pitfalls.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

ZenBusiness is a financial technology company and is not a bank. Banking services provided by Thread Bank, Member FDIC. The ZenBusiness Visa Debit Card is issued by Thread Bank pursuant to a license from Visa U.S.A. Inc. and may be used anywhere Visa debit cards are accepted. FDIC insurance is available for funds on deposit through Thread Bank, Member FDIC.

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