What You’ll Learn in This Post

• The difference between salary, owner’s draw, and distributions for small business owners
• How each method affects taxes, cash flow, and lending potential
• Common mistakes Tacoma and Pierce County business owners should avoid
• Practical tips for creating a stable and tax-efficient pay strategy
• Why planning ahead helps South Sound entrepreneurs build sustainable income

How to Pay Yourself as a Small Business Owner

Running a small business in Tacoma or across Pierce County often means wearing every hat—sales, operations, bookkeeping, and more. However, when it comes time to pay yourself, many owners hit the pause button. Should you take a salary? Write yourself a check as an owner’s draw? Leave profits in the business? Choosing the wrong method can affect not only your tax bill but also your cash flow and long-term stability.

For local business owners, this isn’t a small detail—it’s the backbone of how you support your family while keeping your business healthy. Missteps here can lead to IRS headaches, uneven personal income, or growth stalls because you’ve drained too much too quickly. The good news? With some planning, you can establish a payment strategy that works for both you and your business.

Salary vs. Owner’s Draw vs. Distributions: What’s the Difference?

Salary: If your business is structured as an S-corp or C-corp, you may be required to pay yourself a “reasonable salary.” That means regular paychecks, with payroll taxes withheld, just like an employee. Salaries create predictable income for you and help separate personal and business finances.

Owner’s Draw: Sole proprietors and some partnerships often use a draw—essentially taking money directly out of business profits. No payroll system is required, but the draw isn’t tax-free. You’ll still need to plan for self-employment taxes and quarterly estimated payments.

Distributions: In S-corps and certain partnerships, owners can take distributions in addition to salary. These are generally not subject to self-employment tax, but the IRS expects you to balance distributions with a reasonable wage.

Why This Decision Matters

The method you choose doesn’t just affect your paycheck. It shapes how taxes are reported, how lenders view your income, and how much cash is available to reinvest in your business. A haphazard approach could mean scrambling to cover tax payments, missing out on deductions, or appearing “unfundable” to a bank reviewing your records.

In Washington, salary decisions also interact with state payroll programs, such as Paid Family & Medical Leave, and workers’ compensation, so choosing the right method matters locally as well.

Common Mistakes to Avoid

Even seasoned business owners run into snags when paying themselves. 

A few of the most common:

Underpaying yourself. If you’re an S-corp owner and take only distributions with no salary, the IRS could see that as tax avoidance and flag your return.

Overdrawing business funds. Pulling out too much too soon leaves your company without working capital for payroll, vendors, or emergencies.

Forgetting about taxes. Many sole proprietors underestimate what they’ll owe at year-end because draws don’t automatically withhold for self-employment tax.

Being inconsistent. Irregular or undocumented payments complicate bookkeeping and make it harder for lenders to assess your income when you apply for financing.

Practical Tips for Paying Yourself Right

Know Your Entity Type. Your business structure (sole proprietor, LLC, S-corp, etc.) largely dictates what options you have.

Plan for Taxes. Whether through payroll withholdings or setting aside a portion of each draw, build tax obligations into your pay system.

Balance Personal and Business Needs. Pay yourself enough to meet your household budget, but avoid draining working capital that your business needs to thrive.

Stay Consistent. Lenders and investors prefer to see predictable patterns in owner compensation, as it signals stability.

Get Professional Guidance. What’s “reasonable” or “tax-efficient” isn’t always clear-cut. Having an advisor review your pay strategy helps you avoid costly mistakes.

Planning for the Future

How you pay yourself today sets the tone for your long-term financial health. Consider:

Retirement savings. Structuring your pay through a salary may allow you to contribute to a 401(k) or SEP IRA, providing both tax savings and future security.

Seasonal cash flow. In industries with fluctuations, such as construction or retail, planning ahead helps you maintain a steady income even during slow months.

Scaling with growth. As your profits rise, revisit your pay structure. What worked in the first year may not support both your household and your expanding business.

Closing Thoughts

Paying yourself as a small business owner isn’t one-size-fits-all—it depends on your structure, profits, and long-term goals. The right approach will keep both your personal finances and your business on solid ground.

Let’s review your options and determine the most tax-efficient approach. Reach out to J. Ott Business Solutions today for a confidential conversation about how to pay yourself the smart way—right here in Tacoma and across Pierce County.