Guide · 2026 rules

How to pay yourself: salary, distributions and owner’s draw

How you take money out of your business changes when it becomes an S corporation. Before, you take a draw. After, you pay yourself a salary through payroll and take the rest as distributions. This page explains each one, how it is taxed, and how the split between salary and distributions works.

Updated October 24, 202613 official sources

In short

Before the election, you take an owner’s draw. You are taxed on the business’s profit, not on what you draw.
After the election, you take a salary through payroll first, and the rest of the profit as distributions.
Your salary carries Social Security and Medicare tax. Distributions don’t.
The IRS expects a reasonable salary for your work, and it can treat distributions as wages when the salary is too low.

Before the election: the owner’s draw

As a sole proprietor, or the only owner of an LLC that has not elected corporate treatment, you report the business’s profit on Schedule C of your personal return and pay self-employment tax on Schedule SE. When you move money from the business account to your own, that is an owner’s draw: a withdrawal for personal use.

A draw is not pay, and it is not what you are taxed on. Income tax and self-employment tax are figured on the business’s net profit, whether you draw it out or leave it in the account. So the draw itself is only a transfer: take a little or a lot, and the tax stays the same.

Because nothing is withheld from a draw, the IRS expects you to pay as you go. Individuals, including sole proprietors, generally make estimated tax payments if they expect to owe $1,000 or more when they file. The year has four payment periods.

After the election: two ways to get paid

Once the business is an S corporation, you are an employee of your own company as well as its owner. Money reaches you in two ways:

	Salary	Distribution
What it is	Pay for the work you do, through payroll	Your share of the profit left after expenses, including your salary
Social Security and Medicare	Yes: 6.2% and 1.45% from the business, and the same withheld from you	No
Income tax withheld	Yes, through payroll	No; it may call for estimated tax payments
Reported on	Form W-2	Schedule K-1, as part of your share of the profit
Timing	A regular schedule, like any employee	When the business has the cash, after your salary

The whole saving of the S election comes from the right-hand column. Profit you take as a distribution carries no Social Security or Medicare tax. Profit you take as salary carries the same 15.3% you pay today.

Salary comes first

The IRS treats a corporate officer who works in the business as an employee. When you perform services for the corporation and receive payments for them, those payments are wages, and being an owner does not change that. S corporations must pay reasonable compensation for your services before you take distributions.

Courts back this up. In cases the IRS cites, owners who took distributions instead of wages owed the employment tax anyway. In a 2012 case, an owner took $24,000 a year in wages and large distributions on top. The court agreed with the IRS that the salary was too low for the work, and part of the distributions became wages.

There is no formula for a reasonable salary. The IRS lists the factors courts weigh, such as your training and experience, your duties, the time you put in, and what comparable businesses pay for similar work. Reasonable salary covers them, with Bureau of Labor Statistics pay data for common jobs.

How the split changes the saving

With the profit fixed, every dollar you move from distributions to salary adds payroll tax. That is why the salary decision matters so much. The table runs the calculator for a business with $120,000 of profit at different salaries, for a single filer in the 22% bracket with default payroll and tax-prep costs:

Salary	Texas	California
$40,000	$6,807 lower	$6,013 lower
$50,000	$4,971 lower	$4,181 lower
$60,000	$3,136 lower	$2,349 lower
$70,000	$1,301 lower	$389 lower
$80,000	$535 higher	$1,576 higher
$90,000	$2,370 higher	$3,542 higher

Read down a column: the lower the salary, the larger the saving. But a salary is only safe if it is reasonable for the work you do. A salary set low to grow the saving is the pattern the IRS challenges. The aim is a salary you can support with evidence, such as pay data for your job and area, and the saving that follows from it.

Try your own profit and salary.Profit, state and salary. Two minutes, nothing sent anywhere.

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Taking distributions

Pay your salary first. Run payroll on a regular schedule, then take distributions from what is left.
Distributions don’t have withholding. Your share of the profit still carries income tax on your personal return. If your salary’s withholding won’t cover it, the IRS expects estimated tax payments. Paying at least 90% of this year’s tax, or 100% of last year’s, whichever is smaller, generally avoids the penalty.
Track your basis. Each year you figure your stock basis on Form 7203. A distribution larger than your basis is taxed as a capital gain.
Keep it clean. Move money from the business account to your own as a recorded salary payment or a recorded distribution, not as loose transfers. An owner who used the company account for personal spending was found to be an employee who owed employment tax.

Health insurance

If the S corporation pays your health insurance premiums, it adds them to your W-2 wages for income tax. They are not counted as wages for Social Security and Medicare. You can then generally deduct them on your own return, as long as you could not join a subsidized plan through another employer.

A pay plan in five steps

Set a reasonable salary for your work, with evidence you can keep on file.
Run it through payroll on a regular schedule, with taxes withheld.
Take distributions from the profit that is left, as recorded payments.
Set money aside for the income tax on your share of the profit, and pay estimated tax if your withholding won’t cover it.
Track your stock basis each year on Form 7203.

What is an S corp? explains why the election exists, and Electing S corp status covers Form 2553 and the deadline.

Sources

Sources: 13 official pages

Every figure was read on an official page and checked a second time. Checked October 24, 2026. How we check facts.

An explanation of public rules, not tax advice.

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