Are business owners paid through payroll?

As a small business owner, you may be confused about your business structure and how that impacts how to pay yourself. If you’ve ever wondered, “As a business owner, do I pay myself through payroll?” you’re not alone. Many small business owners are in this boat. They may be wondering how they can receive a paycheck from their own company. The answer isn’t always straightforward because it depends on your business structure and how your company is taxed.

At Paper Trails, we understand the stress and uncertainty that comes with managing payroll and handling the financial side of your business. We’re here to guide you through these complex topics, so you can focus on growing your business while staying compliant with tax laws. In this article, you’ll learn which business owners can be on payroll, how different business structures impact owner compensation, and key tax considerations every business owner should know.

Can business owners be paid through payroll?

Do you own a business and wonder if you can be paid through payroll? The short answer is that it depends on how your business is structured. Some business owners can put themselves on payroll and pay themselves a regular salary, while others cannot. Here’s a simple breakdown of the more common business structures. We provide a more complex breakdown further below.

• Corporation owners (C-Corps and S-Corps) must pay themselves a salary through payroll if they are actively working in the business. In this case, it’s crucial that business owners pay themselves a reasonable salary that aligns with industry standards. The IRS requires this to prevent business owners from underpaying themselves to avoid payroll taxes.
• Sole proprietors, partners, and LLC owners (not taxed as corporations) cannot be on payroll. Instead, they pay themselves through owner’s draws or guaranteed payments.

How owners are paid by business structure

Your business structure determines how you can legally and appropriately pay yourself. Let’s break down the most common business types and how compensation works for each.

C-Corporation

Owners of a C-Corporation can and must be on payroll if they work in the business. This structure offers more flexibility in how owners are compensated.

• Owners must pay themselves a salary through payroll, with proper taxes withheld.
• All pre-tax deductions (health, dental, vision insurance, HSAs, etc.) are allowed.
• Owners may also receive dividends, but dividends are subject to double taxation (the corporation pays taxes on profits, and the owners pay taxes on dividends).

This structure is ideal for owners who want to take advantage of comprehensive employee benefits and structured compensation.

S-Corporation or an LLC filing as an S-Corp

If your business is structured as an S-Corporation (or your LLC is taxed as an S-Corp), you are required by the IRS to pay yourself a reasonable salary through payroll. This means:

• You must run payroll and withhold state income tax (state and federal), Social Security and Medicare taxes, and proper employment taxes (SUTA, FUTA, PFML, etc) from your paycheck.
• You cannot deduct pre-tax benefits (like health, dental, vision insurance, or HSAs) from your paycheck. This is a special carveout for S-Corporations in the Section 125 rules.
• If the business pays for your health insurance, it must be reported as taxable income on your W-2 for shareholder’s insurance, but you can deduct this on your personal tax return.
• Retirement contributions (such as a SIMPLE IRA) are still treated as pre-tax deductions.
• The business cannot deduct disability and life insurance premiums. If they are being paid on behalf of an owner, they either need to be categorized as an Owner’s Draw or run through payroll as a taxable fringe benefit.
• Other fringe benefits, like personal use of a company car or memberships, may also be taxable.

This type of business structure allows S-Corporation owners to pay themselves a salary while also taking owner’s draws from the company’s profits.

Partnership or Single-Member LLC

Single-member LLCs and partnerships are not allowed to pay owners through payroll. Instead, owners take an owner’s draw (for single-member LLCs) or guaranteed payments (for partnerships). Here is some more information:

• These types of payments are not subject to payroll taxes, but owners must pay self-employment taxes (Social Security and Medicare) on their income.
• Owners need to set aside money for quarterly estimated tax payments to cover income and self-employment taxes.

Although this method offers flexibility, it requires careful tax planning to avoid surprises at tax time.

Sole Proprietorship

Sole proprietors cannot be on payroll. Instead, they pay themselves using an owner’s draw.

• Income is reported on Schedule C of the owner’s personal tax return.
• Owners pay self-employment taxes on their earnings.
• There are no payroll tax withholdings, so owners must make quarterly estimated tax payments.

This is the simplest payment method but requires discipline to manage taxes and business expenses effectively.

Tax considerations for business owners on payroll

Above, we covered certain tax considerations that apply to different types of business structures. Below we highlight some of the most important things to remember.

• Reasonable Salary: The IRS requires business owners who are on payroll to pay themselves a reasonable salary that reflects industry norms. To help determine this, ask yourself these two questions: if you were performing the same duties at another company that you don’t own, what would you expect the other company to pay you? And, if you were to hire someone to take over all of your responsibilities for your S-corp, how much would you pay them?
• Self-Employment Taxes: Sole proprietors, partners, and LLC members not on payroll must pay self-employment taxes on business income. The self-employment tax rate is 15.3%. For 2025, the maximum 15.3% tax rate will be on the first $176,100 of your net income. After that amount, only the 2.9% Medicare rate is applied.
• Quarterly Tax Payments: Most owners should work with their tax preparer to ensure that all income is accounted for and estimated taxes are paid when appropriate and advised by their tax preparer.
• Taxable Fringe Benefits: S-Corp owners must report company-paid health insurance as taxable income, while C-Corp owners have fewer restrictions on pre-tax benefits.

Conclusion

Understanding how business owners are paid through payroll depends entirely on how the business is structured. While owners of corporations must pay themselves through payroll, others, like sole proprietors and partners, must use owner’s draws or guaranteed payments. Each structure has its own rules, tax requirements, and benefits.

At Paper Trails, we are committed to helping small businesses navigate these complex payroll and tax considerations. Whether you need help setting up payroll or understanding how to pay yourself, our team is here to guide you every step of the way! Contact us today!