When you’re running a business as a sole proprietor, the lines between personal and business finances can sometimes feel blurry. One of the most common questions new business owners ask is: Can a sole proprietor pay himself a salary?
It sounds like a simple question, but the answer involves a few accounting and tax-related nuances. In this article, we’ll explore the mechanics of how sole proprietors get paid, what you need to know about self-employment taxes, and how to manage your compensation the right way.
What Is a Sole Proprietorship?
A sole proprietorship is the simplest form of business structure. It’s an unincorporated business owned and operated by one person, with no legal separation between the business and the owner.
Key characteristics:
- Easy to set up and manage
- The owner is personally liable for all business debts
- Business income is reported on the owner’s personal tax return
Because the IRS treats the sole proprietor and the business as one and the same, this directly impacts how “paying yourself” works.
Can a Sole Proprietor Pay Himself a Salary?
The Short Answer: No, not in the traditional sense.
Unlike corporations where owners can be W-2 employees, sole proprietors cannot pay themselves a salary as a regular payroll employee. You don’t withhold taxes from your own paychecks or issue yourself a W-2.
How Do Sole Proprietors Get Paid?
Instead of a salary, sole proprietors take what’s known as a “draw” from the business. This is simply withdrawing money from the business for personal use.
Here’s how it works:
- You make a profit in your business.
- You write yourself a check or transfer funds to your personal account.
- You record it as an owner’s draw, not as an expense.
This isn’t considered a business expense, and it doesn’t reduce your taxable income.
Understanding Self-Employment Taxes
Since you’re not an employee, you’re responsible for paying self-employment taxes, which cover Social Security and Medicare contributions.
Here’s what you need to know:
- You pay self-employment tax on net business income, not the draw amount.
- In 2025, the self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare).
- You’ll pay these taxes when you file your Schedule C along with your Form 1040.
Tip: Use quarterly estimated tax payments to avoid penalties.
Best Practices for Paying Yourself as a Sole Proprietor
Even though you can’t give yourself a W-2 paycheck, you should still follow some smart financial practices when taking an owner’s draw.
1. Separate Your Business and Personal Finances
- Open a dedicated business bank account.
- Keep personal and business transactions completely separate.
- This helps with accurate bookkeeping and tax filing.
2. Track Owner’s Draws Carefully
- Record all draws clearly in your accounting system.
- Label them correctly so they don’t get confused with expenses.
3. Plan for Taxes
- Set aside a percentage of your profits (typically 25-30%) for taxes.
- Work with a tax professional if needed to calculate estimated payments.
4. Pay Yourself Consistently
- Establish a routine — for example, draw funds weekly or monthly.
- This helps you manage cash flow and create a personal budget.
What About Other Business Structures?
If you’re considering growing your business, you might be wondering how compensation differs under other structures.
LLC (Single-Member)
- Still taxed as a sole proprietorship by default
- Pays the owner via draws
S Corporation
- Allows you to pay yourself a salary through payroll
- Required to pay “reasonable compensation”
- May result in tax savings
Considering a different business structure? Talk to a tax advisor to understand what works best for your goals.
Pros and Cons of Taking an Owner’s Draw
✅ Pros:
- Simple and flexible
- No payroll taxes or administrative overhead
- Easy to manage for solo business owners
❌ Cons:
- No tax withholding (you must handle that yourself)
- No employee benefits (like 401(k) or health insurance through payroll)
- Harder to show steady income for loans or mortgages
Final Thoughts: Paying Yourself the Smart Way
So, can a sole proprietor pay himself a salary? Not exactly — but you can take money from your business through owner’s draws, and it’s a completely legitimate way to compensate yourself.
What matters most is that you manage your finances wisely, stay on top of your tax obligations, and maintain good records. If your business grows or your needs change, you may want to explore incorporating or forming an LLC to take advantage of other compensation options.
Andre Cuevas provides career insights, job search strategies, and professional advice to help individuals navigate the job market and achieve their career goals.
