How to Pay Yourself as a Small Business Owner
Owner's draw vs. salary, sole prop vs. LLC vs. S-Corp — here's exactly how to pay yourself when you run a small making business.
Last updated: March 2026
Payroll is probably the last thing on your mind when you’re starting a small making business — your focus is on the products, the listings, and finding customers. But having a real strategy for paying yourself is one of the most important things you can sort out early. Get it wrong and you end up draining your business account at the wrong moment, or worse, working for free for months without realising it.
This guide covers everything: how your business structure affects how you pay yourself, the difference between an owner’s draw and a salary, how much you can realistically take out, and why knowing your true costs is the foundation you need before any of this makes sense.
How Your Business Structure Affects How You Pay Yourself
This is the part most guides skip past too quickly. The way you’re legally set up determines what you’re allowed to do — and what the IRS expects from you.
Sole Proprietor
If it’s just you running your business without registering as an LLC or corporation, you’re a sole proprietor by default. It’s the most common structure for makers — there are over 22 million sole proprietors in the United States.
As a sole prop, you and your business are the same legal entity. The IRS treats all business profit as your personal income, which means you pay income tax and self-employment tax on whatever the business earns — not just on what you actually draw out.
You pay yourself by taking what’s called an owner’s draw: a transfer from your business account to your personal account. No payroll processing, no W-2, no employer taxes on top.
Single-Member LLC
Forming a single-member LLC gives you personal liability protection — your personal assets are shielded if the business gets sued — but the IRS still taxes you the same way as a sole prop by default. You’re still taking draws, not a salary. The tax treatment is almost identical unless you make an S-Corp election (more on that below).
Multi-Member LLC
If you have a business partner, you’re likely a multi-member LLC taxed as a partnership. Each member takes draws based on their ownership percentage and pays self-employment tax on their share of the profits.
S-Corporation
S-Corps work differently. As an owner-employee, you’re required to pay yourself a reasonable salary — meaning you run actual payroll, pay payroll taxes, and receive a W-2 at the end of the year. Any remaining profit above that salary can then be distributed as a dividend, which isn’t subject to self-employment tax.
This is why some business owners elect S-Corp status when profits get high enough: it can reduce total self-employment tax. But it comes with real overhead — quarterly payroll filings, payroll software, and more complexity. Generally not worth it until you’re consistently netting over $40,000–$50,000 per year.
For most makers, sole prop or single-member LLC is the right starting point. Read our guide to choosing the right structure for your handmade business →
Owner’s Draw vs. Salary — What’s the Difference?
Here’s a quick comparison:
| Owner’s Draw | Salary (W-2) | |
|---|---|---|
| Who uses it | Sole props, LLCs | S-Corps, C-Corps |
| Payroll taxes | No — SE tax on net profit instead | Yes — employer and employee shares |
| Recorded as | Owner’s withdrawal (equity) | Business expense |
| Tax reporting | Schedule C / K-1 | W-2 |
| Flexibility | Any amount, any time | Fixed, regular schedule |
| Complexity | Simple | Requires payroll processing |
The key thing to understand about an owner’s draw: it is not a business expense. This trips up a lot of new business owners who record their own pay as a cost in their books. Your draw comes out of business equity — the profits you’ve already accounted for. Recording it as an expense would count it twice, giving you an artificially lower profit figure on your Schedule C.
How Much Should You Pay Yourself?
There’s no fixed rule, but here are three approaches that work:
A percentage of revenue. Take a set percentage of whatever comes in each month. This scales up when business is strong and contracts when it’s slow. It requires some discipline to define the percentage based on your cost structure, not just what feels right.
A fixed draw. Transfer a consistent amount to yourself, like a self-imposed salary. This gives you personal financial stability. The risk: if you set it too high and revenue dips, you’ll eat into funds earmarked for materials or other business costs.
Nothing, and reinvest everything. Sometimes the right call in the very early stages — especially for inventory-heavy businesses where cash tied up in stock enables future sales. But it has a ceiling. You can’t run a business indefinitely without taking something home.
Any combination of these works. Take a modest fixed monthly amount for living expenses, plus a quarterly draw when profits allow.
Seasonal Income Variability for Makers
Most making businesses have lumpy revenue. Sales spike around Christmas, Valentine’s Day, or Mother’s Day, then go quiet. A fixed draw that works in November can leave your business short in February.
The practical fix: build a cash buffer. Keep 2–3 months of operating expenses sitting in your business account before you start drawing regularly. This lets you pay yourself consistently through slow periods without scrambling. Some makers separate a “tax holding” account too — more on that below.
You Need to Know Your COGS First
Here’s the part that connects paying yourself to the actual health of your business.
Before you decide how much to draw, you need to know what your products actually cost to make — not just materials, but your time, packaging, and a fair share of overhead. This is your cost of goods sold (COGS).
If you’re guessing at your costs, your profit figure is unreliable. You might think you have $2,000 available to draw — but if you haven’t accounted for $800 in materials already consumed, your real profit is $1,200. Draw the full $2,000 and you’re drawing against future orders you haven’t yet fulfilled.
This is how makers end up “busy but broke” — high sales volume, constant work, and somehow nothing left at month end.
Tools like Craftybase track your material costs and calculate COGS automatically as you manufacture products and fulfil orders. That means your profit figure is based on real data, not estimates — which gives you solid ground when deciding what to draw. See our guide to calculating your cost of goods sold → for the full breakdown.
How to Actually Pay Yourself
Once you’ve worked out how much to take, the mechanics are simple for a sole prop or LLC:
Bank transfer is the cleanest option. Set up a scheduled transfer from your business account to your personal account. Traceable, easy to find in your records, takes two minutes to configure.
Write yourself a check. Less common now, but completely valid. Keep a copy for your records.
Cash withdrawal works if your business takes cash payments at markets or craft shows. Just record it in your books as an owner’s draw the same day.
Whatever method you use, always run it through your business bank account and record it properly. This keeps your finances clean and your draws traceable at tax time.
Keeping Business and Personal Finances Separate
As a sole prop, you and your business aren’t separate legal entities — but your finances absolutely should be kept apart.
Open a dedicated business bank account (and ideally a business credit card). All business income lands there; all business expenses leave from there. Your personal account is where draws arrive, and nothing else.
Without this separation, your bookkeeping becomes a puzzle and your tax return becomes a headache. It also makes it much harder to see your real profit — which is the number your draw depends on.
If you want your business to operate under its own name, file a DBA (“doing business as”) and open an account in that business name. Worth doing even as a sole prop if you want your business to feel — and function — like a real company.
Self-Employment Tax — What You Need to Set Aside
One thing many new sole props miss: you’re responsible for both the employee and employer portions of Social Security and Medicare taxes. For 2025, that’s 15.3% on net self-employment earnings up to $176,100 (12.4% Social Security + 2.9% Medicare), plus an additional 0.9% Medicare surcharge on earnings above $200,000.
The good news: you can deduct half your self-employment tax from your gross income on your federal return, which softens the hit somewhat.
Because these taxes aren’t automatically withheld, you need to make quarterly estimated tax payments to avoid underpayment penalties. Setting aside 25–30% of net profit for taxes is a reasonable starting estimate, though your actual rate will depend on your total income picture.
For a full walkthrough of filing as a self-employed maker, see our Schedule C guide →.
Frequently Asked Questions
What is an owner's draw and how is it different from a salary?
An owner's draw is a withdrawal of funds from your business equity — it's how sole proprietors and LLC members pay themselves. It's not recorded as a business expense and not subject to payroll taxes at the time of withdrawal. A salary, by contrast, is a fixed wage paid through payroll (used by S-Corp owners), recorded as a business expense, and subject to both employer and employee payroll taxes. Most makers use draws; salaries only come into play once you elect S-Corp status.
Do I have to pay taxes on money I take out as an owner's draw?
Not directly on the draw itself — but yes, you pay tax on the underlying business profits. As a sole proprietor, the IRS taxes your total net business profit (revenue minus deductible expenses), regardless of how much you actually withdraw. The draw amount doesn't change your tax bill; your Schedule C net profit figure is what matters. For 2025, self-employment tax is 15.3% on net earnings up to $176,100, plus income tax at your marginal rate.
How do I know how much I can afford to pay myself?
Start with your real net profit: revenue minus COGS (materials, packaging, direct labour) and operating expenses. Set aside 25–30% of that for estimated taxes. What's left is what you can draw without putting the business at risk. Keep a buffer of 2–3 months' operating expenses in the account before drawing regularly — this covers slow seasons. Craftybase tracks your COGS automatically as you manufacture, so your profit figure reflects actual costs rather than rough guesses.
Can I pay myself a salary as a sole proprietor?
No — sole proprietors cannot pay themselves a W-2 salary. The IRS doesn't allow it because you and your business are the same legal entity. You can set up a scheduled draw that mimics a salary (a fixed transfer on the same date each month), which gives you the personal financial predictability of a paycheck. But it's still an owner's draw, not a salary expense, and doesn't involve payroll processing. To pay yourself a true salary, you'd need to elect S-Corp status.
Should I open a separate bank account for my making business?
Yes — this is one of the most practical things you can do from day one. A dedicated business account keeps income and expenses cleanly separated from personal finances, makes bookkeeping far simpler, and gives you a clear picture of what the business is actually earning. Every draw to your personal account is clearly logged. You don't need a formal business account immediately — even a separate personal account used exclusively for business works — but a proper business account is better for record-keeping and credibility with suppliers or wholesale buyers.
Paying yourself isn’t just a financial step — it’s a signal that you’re running a real business. Getting the basics right from the start (separate accounts, draws recorded properly, costs tracked accurately) means you’ll have solid numbers to work from rather than discovering gaps at tax time.
If you’d like a clearer picture of your real profit margins before deciding on a draw strategy, try Craftybase free for 14 days — no credit card required.
