How to Pay Yourself as a Freelancer: Owner's Draw vs Salary

There are two main ways owners pay themselves: an owner's draw and a salary. Which applies depends on your business structure, and the difference affects your taxes and paperwork.

Owner's draw: sole proprietors and single-member LLCs

If you are a sole proprietor or an LLC taxed as a sole proprietorship, you do not receive a paycheck from your business. You take an owner's draw, which is a transfer from your business account to your personal account.

Key points:

• A draw is not an expense and does not reduce profit.
• You pay income tax and self-employment tax on the business's profit, whether or not you withdraw it.
• No tax is withheld from a draw, so you must pay estimated taxes.
• You can take a draw whenever you like and in any amount, subject to the cash in the account.

Salary: S corporation owners

When a business elects S corporation status, the owner who works in the business must be paid a reasonable salary through payroll. That means:

• Withholding of income tax, Social Security and Medicare from each paycheck.
• Payroll tax filings and a W-2 at year-end.
• Additional profit can be taken as distributions, which are not subject to self-employment tax but are still subject to income tax.

The IRS expects a salary that matches what you would pay someone else to do your work. Very low salaries are a common audit trigger.

Comparison

How to take a draw in practice

1. Decide a regular monthly amount using your baseline budget.
2. Transfer it on a fixed date from business to personal.
3. Record it in your books as an owner's draw, not as a business expense.
4. Keep your tax set-aside separate and pay estimated taxes quarterly.

Why draws do not change taxes

Many new freelancers believe that withdrawing less lowers their tax. It does not. The IRS taxes profit, not withdrawals. If you earn $70,000 of profit and withdraw $40,000, you still owe tax on $70,000.

When to consider an S corporation

An S corporation can reduce self-employment tax once profit is steady and high enough to justify added costs such as payroll services, a separate tax return and state fees. Many advisers start looking at it when net profit is consistently well above $60,000 to $100,000, but the break-even depends on your state and situation. See our guide to when an S corp makes sense.

Common mistakes

• Treating owner's draws as wages and trying to deduct them.
• Taking money out without keeping enough for estimated taxes.
• Paying personal bills from the business account.

Frequently asked questions

How much should I pay myself?

Start with your baseline budget, and let the buffer absorb swings.

Do I need payroll software?

Not for a draw. You will need payroll once you elect S corporation status.

Can I switch later?

Yes. You can elect S corporation treatment in a future year, subject to IRS rules and deadlines.