Episode 9: How to Pay Yourself as a Business Owner

In this episode of QuickBooks Mastery for Small Business Success, father-daughter team Erica Northrup and Lee Davis break down one of the most common small business questions: “How do I pay myself?” They explain why the answer depends on your business structure and financial goals, and they walk through the three main legal methods of paying yourself—owner’s draw, salary, and distributions/dividends.

They also cover how to decide what’s right for you, why your business plan matters, how to avoid common IRS issues, and how QuickBooks can help you track owner pay properly with reports, payroll, and bank rules. This conversation will help business owners avoid tax surprises, protect cash flow, and build a clean system that supports both the business and the owner.

Key Takeaways

1. The right way to pay yourself depends on your business structure (LLC/sole prop vs S-Corp/corporation).
2. Owner’s draw is not an expense—it shows on the balance sheet (equity), not the P&L.
3. Salary requires proper payroll setup and payroll tax compliance—don’t run payroll for an LLC owner like an employee.
4. Disability insurance taxation depends on who pays the premium (owner vs company).
5. QuickBooks helps track owner pay with reports, bank rules, and payroll tools—keeping everything clean for tax time and lending.

Questions to Reflect On

1. Am I paying myself based on what I need, or what the business can actually afford right now?
2. Do I understand which payments are deductible business expenses vs personal spending?
3. Is my QuickBooks set up so owner pay is categorized correctly and easy to explain at tax time?

Mentioned in This Episode

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Timestamps

Chapters:

01:16.514 - Why paying yourself the right way matters

04:46.009 - Method 1: Owner’s Draw (LLCs, sole props, partnerships)

9:32.848 - Method 2: Salary (S-Corps / corporations)

11:10.325 - Method 3: Distributions / Dividends

12:07.942 - How to choose the best method (income, risk, goals)

15:11.774- How QuickBooks helps (reports, payroll, bank rules)

16:58.036- FAQ: How much should I pay myself?

17:58.784 - FAQ: 401(k) and retirement priorities

18:40.693 - FAQ: Disability insurance—who should pay?

19:49.045 - FAQ: Paying yourself in an LLC (frequency + structure)

21:53.270 - FAQ: Deductions and what you can/can’t write off

22:53.672 - Common mistakes to avoid (payroll errors, mixing accounts)

24:10 - Payroll tax warnings and why payroll services matter

Call to Action

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Welcome to QuickBooks mastery for small Business Success.

I'm Erica Northrup.

And I'm Lee Davis.

I handle the tech and he handles the numbers.

And together as a father daughter team, we bring decades of experience helping small to medium sized businesses thrive.

We know that as a business owner, your time is best spent mastering your craft and growing your business, not getting lost in QuickBooks.

Managing finances can be confusing and you don't have hours to waste sorting through spreadsheets or fixing bookkeeping mistakes.

That's where we come in, helping you streamline QuickBooks so you can focus on building your business.

Each week, we break it all down into simple, actionable steps so you can focus on growing your business, not fixing your books.

Let's embark on this journey together.

Welcome back.

We are back with episode nine, how to pay yourself as a Business Owner.

If you've ever asked, can I transfer money to my personal account?

This episode is for you.

Today we're breaking down exactly how to pay yourself the right way, no matter your business type.

So as we were just alluding to, Papa, this is probably one of those most asked questions, right?

When you have sole entrepreneurs or people that have an LLC or different various kinds of businesses, how do I pay myself?

How much do I pay myself?

We have a list of commonly asked questions and we're gonna go through all of those.

But let's just break it down.

Why this question is so important, Papa, why?

I mean, clearly people don't necessarily just get into business for the fun of it.

They are in it to provide an income for their families and for themselves and to build a life and all the things.

And making money that is part of owning a business, right?

Well, I hate to say it, but people don't like it when I say it.

It all goes back to the business plan.

What did they figure they could make?

Year one, year two, year three?

And it should be factored in what you're going to pay yourself.

So people sometimes will estimate a higher amount to pay themselves based on what they think they should get.

And I said, here's what you can get.

So, I mean, people have mortgages and they have, you know, lives they've really got to lay out.

What exactly is their monthly requirement?

Then they've got to ask themselves, well, given my current business, am I able to support that?

And that's the very question when they think to themselves, how much can I get paid?

Because sometimes when you look at how much you are paying out, you have to factor in, well, what is my tax consequence?

So you want to look at your business from a perspective of a tax vehicle or a tax mechanism.

How do I pay the least amount of taxes and record and be able to legally claim the business expense?

Because if you go the wrong way or use the wrong method, you can create some red flags that could get you on the IRS's radar and create some major headaches for yourself in the future if you don't do it the right way.

Well, that's right, because some people have said they may want to pay themselves, quote, unquote, under the table.

Well, I said, well, that doesn't exactly work.

I said under the table is definitely not a method.

Okay, Not a method.

There are kind of three main methods.

We're going to go over those.

And definitely paying under the table is not one of the methods.

Under the table is not something you want to consider as a method to pay yourself.

You need to be able to appropriately report your income to the IRS in whatever method you choose.

When you applied for whatever type of organization you want to be, whether you want an llc, an S Corp or a full blown corporation, you want to understand that that's the method you reported when you started your business.

And now that could change.

But that's why getting a tax professional and a lawyer is critical when you get started.

Right.

People don't oftentimes think, well, I don't need to pay for that.

Well, no, you do because it will save you money in the long run.

Yeah, Just setting things up the right way.

Right.

All going back to why do you need that business plan?

Because when you have the right foundation, when everything is set up the right way, things just simply work, work.

They work better and they work more efficiently.

And you already know those kind of expectations, know how much you know you really need to make and what, what is the expectation for how much is coming in for this business.

So we're going to go over kind of three main ways that are the legal ways to pay yourself.

And the first way is owner's draw.

And this is commonly for sole proprietors and partnerships.

Yeah, a lot of my clients will sometimes get confused about when they're paying their employees.

They would like to be paid as through the payroll company as well.

No, not unless they are a corporation.

Would they be considered able to draw a salary?

A corporation that can be treated as a separate entity as opposed to the llc which you're going to draw money.

Out, you're just going to pay yourself.

Yes.

A salary every week.

Right.

Or you're going to just draw up money once a month and Lots of times people realize when they're trying to estimate their draw, what should it be?

And then you have to ask yourself, well, how much is my business paying me for various fringe benefits, like a car loan?

If the business is paying for your transportation, if you.

If the business is paying some expenses, if you're choosing to take those kinds of expenses, what should I consider in the amount that I need to live off of?

And so I hear from my clients, oftentimes they say, well, I've got a mortgage to pay and I've got these various other expenses.

You add those up and say, all right, this is what I think I need now.

And then you have to ask yourself, can my business support that, or do.

You need to work up to that?

What is the amount?

I have one client, particularly, who looks at what his employees get paid, and they get paid every week, and he gets paid once a month, and to him, he should be paid more.

I said, well, it depends.

Your employees are not getting all the benefits that you are necessarily taking out.

Right.

So I. I think that lots of times people will say, when they're wanting to know, where does my draw show up?

Well, your draw shows up on the balance sheet, Right?

A draw on your business, an equity account.

It's not an expense.

And so therefore, it's not built in like a standard expense.

You get paid based on what's left over.

It's really what it comes down to.

What really.

If you look at it lots of times, when your business files on a llc, they'll file a schedule C at the end of the year, and that directly becomes taxable to you.

Whatever's on your Schedule C gets reported as business profit.

That's what shows up on your tax return.

So, yes, you should keep in mind how much your business is causing you a tax consequence, and you should look to eliminate as much of that as possible.

And that's where having that accountant that knows those in and out, all the taxes, laws and everything can tell you, yep, you can take that much, or you can take this much, or you can claim that thing, or, nope, you can't claim that thing, or you can only claim 8% of this particular thing, or.

Yeah.

Whatever the case may be.

Yeah.

And I think we'll get to it a little bit later.

A common question is, would I be better off taking mileage versus having your business pay for you for a vehicle?

Just look at how much you can deduct an interest.

You can't deduct the principal, but how much interest could you deduct on a vehicle.

Yep.

And you have to say, well, if I took mileage, would I be better.

Off just looking at the pros and cons of either option?

Well, it doesn't necessarily fall into the draw component.

It does mean that you need to think about the tax consequence of your business.

Yeah.

And just remember that you'll pay that personal income tax on that money at tax time, whatever you pay yourself, you're going to be paying tax on.

And oftentimes when you are deciding to get started, you may want to set up with the IRS and pay like your accountant will say, I would suggest you pay quarterly.

Yeah.

So it's not a huge payment come tax time.

And I will have some clients, when they talk about paying themselves, they'll choose to say, okay, well, I think I want to pay myself 10,000 and I want to put aside 2,000amonth.

For taxes.

For taxes.

Very smart.

With your money, rather than thinking about there's no tax consequence for me.

Very smart.

Yeah.

So I think when you're going to be subject to that draw account, then you want to understand that April 15th comes around.

It comes around pretty quick.

And you want to be able to understand what it means when you take money out of your company and how you will minimize the tax effect.

Well, that's owner's draw.

That's kind of the first way you can pay yourself.

And then kind of the second way is salary.

So this is common for incorporating businesses S corps and things like that.

I think there are certain advantages to the S Corp.

There are some people who feel like they want to draw salary and it perhaps might be a taxable advantage to them.

Yeah, you need to look at those.

And there's some people, frankly, that are just happier to be an employee to get their check every week.

Yeah.

And rather than a lump sum at the end of the year, there are certain features that benefit.

And I think you always say to people, well, the LLC is what it says, a limited liability corporation, you have more liability.

Under an llc, an S corp, you have more protection.

And so you want to decide, well.

How much risk am I willing to take?

Will I feel like my assets are protected?

So again, it may be a little bit about how you're paying, but it also may be to say, what's the tax vehicle that gives me the most advantage?

Right.

At the end of the day, how am I going to save the most money?

By which option am I going to choose?

That's right.

It's a vehicle.

Are you going to drive the Toyota Camry or Do you think you need to drive the Tesla?

They both get you to the same.

Destination, the same place.

Right.

They have different bells and whistles and different benefits to each.

Good way to think about it.

There are some tax advantages.

So particularly now in the changing tax code, there may be something you should look at with your tax professional.

Okay.

So the last method is distributions or dividends for corporations.

Yeah.

And this doesn't necessarily get you a paycheck necessarily, but it might be a way for you to take money out of a company as an investment.

Okay.

That yields a better tax advantage for you.

So like stocks and bonds and things like that.

Yeah.

You're going to profit from the stocks that business has.

And look at the tax benefit of deferred income, if that's the best vehicle for you.

Wouldn't be like the Lamborghini of maybe need any money.

You don't need any money.

You have some money coming in from other sources.

Yeah.

And.

But you need this particular business to be.

Right.

A distribution type company at the end of the year.

Yeah, it makes a lot of sense.

Okay, so now that we've talked about the three methods of how to pay yourself or our three different cars, how do you decide which method is right for you?

Well, I think it comes down to how much is your income going to be?

What are you starting out?

So if you get a company that makes maybe 2 to $300,000 a year, then an LLC works fine for you.

Right.

But when you get up to the company that makes a million to 3 million, you may want to start to think about that might be a case where you start looking at a corporation, an S corp.

Right.

And then if you own various companies, then there could be a case where you might have an S corp, but you also might have a company that is a distribution or dividend corporation that helps you manage those revenues.

So yeah, I think it sometimes is driven by the amount of your sales, but it also is determined by your tax situation.

Like if you're a partnership and you definitely get a K1.

Okay.

You don't really have a choice.

All right.

You get a distribution statement.

So some of the choices you make are determined on your tax situation, but then you have control of other opportunities.

So I think it goes back to understanding your business and how to maximize your tax savings.

And this could all be part of your business plan.

Right.

You start one place, you have the vision to grow your business to a 3 million plus business, but you're starting from ground zero, ground floor and up.

Right.

So maybe you're not there yet, but you start with the LLC doesn't mean that when you reach 400,000, 500,000, you start to think about and plan for those changes that are going to come.

Have those conversations with your tax consultant, have conversations with your accountant, with your bookkeeper.

Really have a pulse on where you're at so that you can continue to grow your business at the rate that you want to grow your business and.

Keep abreast on tax changes.

Have an accountant who you feel like works with you and is on top of your company.

I used to have a company that met annually with their lawyer and their tax accountant together.

It's really smart and to consider various business changes that should come into play.

Because sometimes you have to look at the business one vehicle separate, and you have to look at the individual and say, well, what's best on the business side?

But what would be best for the individual?

Yeah, absolutely.

Be the same.

Getting to look at both of them is important from a perspective of what are their goals.

You know, maybe the business goal is to get so much in assets.

Yeah.

Because they want to do an acquisition.

Who would like to maximize their retirement?

Having, having that business plan, but then having goals and where you want to go with that business is going to deter.

Determine a lot.

Yes, yeah, absolutely.

Small businesses will start out as an llc.

Yeah.

Start out there.

They'll grow from there.

Yeah, yeah.

It makes a lot of sense.

Okay, so now let's turn our attention to QuickBooks.

How can QuickBooks help you with all of this?

What are some of the tangible ways that QuickBooks can help you track your income?

All these different aspects, I think you look at that.

QuickBooks can give you a report to show you what your profit is.

So that becomes an important number to say, okay, what's my net and my gross profit and what are my expenses?

And you factor in how do I figure out what my responsibility is?

Right.

And you look at your net income, but you also keep an eye on what is my business worth?

What is the balance sheet that shows that my business is worth?

Yeah.

So if, if people are looking at your business, they're going to look at your owner equity.

How much is that business worth?

Have they invested in, have you invested in your business or have you taken it all out?

So then of course you can do payroll efficient.

If you're a S corp, you can pay yourself directly through payroll with QuickBooks and you're able to track, if you need to give a report to the bank as to, if you're, if you're going for a loan, it's pretty easy to run that report and give them an earnings statement.

Yeah, very helpful.

You can use the bank rul tools too.

Automatically tag transfers as owner's draw or shareable salary.

So those are all ways that you can use QuickBooks to kind of help you manage what you are paying yourself and to keep track of all of that.

That's correct.

It's a good tool to keep everything in one place.

Okay, so let's turn our attention to some of the most commonly asked questions.

And maybe I'll ask the question and you can give us the straightforward answer.

Papa.

Yeah.

How much should I pay myself?

Well, I think the answer to that question is clearly, how much can my business afford?

Is one question.

But then how much do you need?

And you might need to look at your expenses and say at this point I need to lower my mortgage.

Right.

If you're starting out that when you look at, well, how much can my business support.

Yeah.

Then you can be congruent.

It's taking an honest look at your business.

Yeah.

And also projecting forward and where do you want to be in 10 years?

There are other benefits to having a business beyond just the salary that you're getting.

There's other fringe.

It's like you've talked about that some owners, I feel like I'm paying my employees more than I'm paying myself.

That's right.

Yes, you are.

Probably.

However, they're not getting these other benefits of having the business, like the vehicle or being able to claim some of your house.

There are all kinds of tax benefits that you can, you can take.

Okay, really good.

So what about a 401k?

How do I get that?

I think the common question is in the tight employment market, if you have employees, they get a 401k.

Yeah.

And should I get a 401k?

And my answer to them, quite frankly is always, well, let's get your retirement account settled first.

And then as we think about what we can put into a 401k for employees and the budget will support it.

Yeah.

Fund a 401k.

If you're not funding your own SEP.

IRA, your own right.

Yes, absolutely.

Talking about when you're in an airplane, start with yourself first.

Put your mask on first before you put the kids mask on.

That's correct.

Yeah.

What about disability policy?

Does my company pay it or do I pay it?

You have to ask yourself again.

If you become disabled and you receive payments from the insurance company, those payments will not be taxable.

If you pay the premium yourself.

If your company pays the premium and takes it as a tax deduction, those premiums are going to be fully taxable to you.

Yeah.

I think that there's one school of thought that says I don't think I'll ever become disabled, and therefore I'm going to have my company pay the premiums and put that money aside and invest.

Or I think I want to be cautious and I don't want to have to pay the tax on a disability payment.

And I'll pay the premiums because the monthly premium may far outweigh the benefit.

Your annual premium may be a thousand to $1,500 a year, but you could get a monthly premium of your salary that's fully tax free.

So you have to say, okay, which is it?

Which works for me.

Okay, next question.

How could I pay myself if I am an llc, I have some people.

That say, listen, I need to be paid the first of the month, and you draw a check, and my check is always drawn the first of the month, and that's when I get paid.

Or I don't have many of my LLC that are paid every week.

Now I have somebody that takes money out, $500 every week from his bank account.

Yep.

And that's the standard.

Yeah.

And that's the way he works.

I guess it depends on how you want to have it broken up, if that's right.

Yeah.

If Maybe as an LLC, you're paying yourself $2,000 a month, you know, maybe you want to break that up into chunks over four weeks, or maybe you want to pay it in one big chunk.

One of the things we looked at is what expenses are fully tax deductible for my llc.

And what should I pay, like your life insurance for you?

That's not a business deduction.

That's purely personal.

Purely personal.

I mean, that's.

If you pass away and there's a life insurance benefit that goes to your spouse, then clearly that's a very taxable event.

Now, for some reason, you have chosen an insurance vehicle that would benefit your business.

Then that's a different type of policy.

So I think really understanding your insurance is the key, key factors here.

Just like you review with your accountant and your lawyer, you sit down with your insurance guy.

Right.

And say, I need to review my insurance at least every other year.

Have a pulse on what's going on.

Yeah.

And then maybe if you think about, like, insurance, I'll have people say, well, it's very expensive to get health insurance.

That's very expensive to carry Health insurance for employees.

But what about me?

Right.

And so, you know, you may want to think about, I could have my own.

I could get insurance through the exchange, or you might think about getting dental insurance.

That's fully deductible.

You want to be able to understand the whole insurance world.

Right.

Because that's a real expense for you if you're paying out on the other end because you don't have insurance.

No, absolutely.

And this moves into the next commonly asked question that you get a lot is what are the most deductions I can take?

And I think that's where your tax professional comes in.

Right.

And you'd say, all right, you know, it's quite clear you can't deduct for an llc.

You can't as a business expense.

It doesn't come off as a draw.

But what can I deduct?

Right, right.

And should I maybe think about my corporation and S Corp if I want to be able to deduct my salary?

Yeah.

It all gets back to what the rate is.

Where do I get the most benefit from the tax vehicle.

Right.

And I'll have people misunderstand that they can't deduct their whole vehicle costs unless they take mileage.

Because you can't deduct a principal.

You're just paying back the loan.

That's just nothing.

But you can deduct the interest and you can deduct certain type of vehicle expenses.

Like the oil changes and the repairs on the car.

Exactly.

Yeah, absolutely.

So I guess that kind of then feeds really well into common mistakes, mistakes to avoid.

One common mistake that I see over and over again is if they didn't come to me and they started paying themselves through payroll and they're an llc.

Then you'll have to send in a correction to the irs.

Right.

The money you paid back on taxes.

And you'll have to file appropriately for that.

It's a big headache.

Don't just start thinking, I'm going to pay myself through payroll service just like I pay my employees.

So that's one of the most common mistakes.

And the other error that I see, quite frankly, is that people will think they can pay themselves and deduct it.

And you say, well, no, you need to be an S corp. Is that called double dipping to deduct that?

Double dipping, you can't double dip.

Can't do that.

Right.

Sometimes people will see at the end of the year they don't know.

And most common question I get at the end of the year is, where did all the money Go.

Okay, so I made this much profit.

Where is it?

Well, you start analyzing it and you say, well, you drew out a lot of money or you paid a lot out in credit card debt, other things, or you've mixed your personal business.

There's some things that are not deductible.

Do not mix personal business.

Don't do that.

Right.

So I think that there are some chargebacks to you if you're using your business for personal benefit.

Like if you have a vehicle that use both for personal and for business and if you have a rental, if you have a place where you both live and work and you are going to deduct it all.

Well, no, you can't do that either.

Can't at all.

They're not using it all for business.

So you have to begin to understand that your business is a separate entity, that you can expect it to provide a salary for you or expect income for you.

But it's not a complete write off.

I'll get the question all the time.

I.

Well, can I write that off?

When the IRS comes knocking on your door, they clearly will point out to you if something you've taken is not deductible, you can't write that off.

Yeah.

And I guess that is one of the biggest mistakes.

Right.

Also is just not having those conversations with your accountant, with your bookkeeper, not creating that good foundation where these are things I can deduct.

Nope, those are things I cannot deduct.

So you have the right expectations as far as your business is concerned.

Yeah.

And I always recommend people use a payroll service and file, let them file your payroll taxes for you each week.

You know how much that is.

It has to be sent in to the irs.

Don't do payroll yourself.

And certainly if you stop making your tax deposits on time, you're going to have penalties.

You've deducted money from your employees pay and you have to match it with the irs.

So don't think that because you're short cash that you don't pay your payroll taxes.

That is a definite mistake and a common mistake.

And when you're digging yourself out of it, the penalties and late filing fees are extensive.

A client came to me, he said, lee, I'm in this mess.

I want you to set up a payroll company for me.

Take care of it.

Let someone else handle that.

Like the little that you're going to be spending on a payroll company.

If you think about down the future and the headaches that all of that causes, like they probably save them thousands and thousands of dollars by using a company opposed to just trying to do it yourself.

And you know, they think they might have saved money because their wife or their girlfriend can take care of it for them while the owner has no idea what they're doing.

That not having a professional take care of your business in some fashion will wind up costing you in the end.

Yeah.

And if you're looking for an accountant or someone to do your tax, we have several contacts that we can certainly pass along.

So you can reach out to us@our supportavisoncompany.com drop us a line, ask us questions.

We are here to support our listeners in any way we can.

But yeah, doing things the right way the first time saves a lot of headaches in the future.

And that's definitely one of them for sure.

I had a potential client who called me a month ago, two months ago, and said, listen, we're thinking of starting this business.

Would you help us?

And when we get ready, we'd like to sit down with you.

Yeah.

And all the very same questions about how should I pay myself?

What can I deduct?

What's advantageous?

And so again, working with a good tax professional and a good bookkeeper who can help you with this area will save you a lot of time and money.

Well guys, that wraps up episode nine.

I found that actually super helpful.

I've never truly understood the difference between an LLC and a C corp, and now I got it.

I'm still learning things even at my age, which is great.

If this episode helped clarify how to pay yourself, share it with another business owner who's been one winging it.

And if you're still not sure what's right for you, reach out to us at Leedavis & Co. And we'll help you set up a system that works because we are here to help you for sure.

Have a great week and we'll catch you next week with your next episode.

Bye for now.

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