How Do I Pay Myself as a Sole Proprietor—and How Much?

How to pay yourself as a sole proprietor? Our comprehensive guide answers this common question among entrepreneurs.
Rieva Lesonsky
By Rieva Lesonsky 
Edited by Sally Lauckner

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.

MORE LIKE THISSmall Business

When you first had the idea to start a business, payroll was probably not something you considered. But now that your business is off the ground, you have to decide what you'll pay your employees (if you have any)—and, just as important, what you'll pay yourself. And while the question of how to start a sole proprietorship is relatively simple (get whatever permits and licenses you need, open up a business checking account, and you're ready to go), a less easy question is: "As a sole proprietor, how do I pay myself?"

Unfortunately, the answer isn’t “whatever you want it to be.” Whenever you sell something and make money, the IRS, along with a few other federal, state and local agencies want a piece of it. Generally, what a sole proprietor can pay themselves is determined by the amount of equity they have in their business, and what they need for living expenses.

If your business is just starting out, you may think you can pay yourself nothing and live on your savings while the business gets off the ground. In reality, however, it’s important to pay yourself something—first, to prove to the IRS that your business is a real business and not a hobby, and second, to create accurate financial projections.

If your sole proprietorship achieves break-even or profitability based on your not taking a salary, that’s not an accurate measure of success. In particular, if you’re seeking any type of business financing—such as a small business loan, private investment capital, or venture capital—potential funding sources will want to see that your business can pay all of its overhead costs, including owners’ salaries, and still make a profit.

To get started determining your salary in a sole proprietorship, it helps to understand what a sole proprietorship is, and why 23 million businesses in the U.S. choose to operate as a sole proprietorship.

What is a sole proprietorship?

According to the IRS, a sole proprietorship is an unincorporated business entity with one owner. Spouses can also jointly own and operate a sole proprietorship.

A sole proprietorship doesn’t require you to file business formation papers with the state. So if you’re running a business on your own and haven’t registered the business, you already have a sole proprietorship. In fact, the moment you begin offering goods or services for sale, you are operating as a sole proprietorship.

As a sole proprietor, all business profits pass through to you and are reportable on your personal income tax forms. You will need to pay state and federal income taxes on all your profits, and you will need to pay a self-employment tax. Common examples of sole proprietorships include freelance writers, consultants, and bookkeepers.

This type of business arrangement has some marked benefits and drawbacks. Let's go over them.

Sole proprietorship pros

  1. A sole proprietorship is very easy to start. There’s no need to register or incorporate your business with the state. All you have to do is obtain any business licenses and permits that your state or local government requires.

  2. A sole proprietorship has minimal legal requirements. Sole proprietors don’t have to keep a bunch of documentation to maintain their business’s legal status.

  3. Managing a sole proprietorship is easy. You have no partners (unless you decide to go into business with your spouse), so you have complete say over all business decisions. In addition, because all profits pass through to you, your personal and business financial and legal situation are the same.

  4. Sole proprietorship taxes are simple. The owner reports business income and losses on their personal tax return. You simply need to attach a Schedule C to your 1040 tax return.

Sole proprietorship cons

  1. Sole proprietorships face unlimited personal liability. In other words, you can be held personally liable for your business’s debts and obligations. That means creditors can go after your personal assets to get their money.

  2. Sole proprietorship taxes are higher. All sole proprietorships must pay income taxes and self-employment taxes on the total income of the business. If your business is making a lot of money, that can be a big chunk of change.

  3. There is more work to do. As a sole proprietor, you have to take care of marketing, finances, strategy, leadership, and basically every other responsibility. This could create burnout very quickly.


Found Small Business Banking

Found Small Business Banking

NerdWallet Rating 
Annual Fee 


Compare Cards

NerdWallet rating 
NerdWallet rating 
NerdWallet rating 
Annual fee


Annual fee


Annual fee


Regular APR

18.49%-26.49% Variable APR

Rates & Fees

Regular APR


Rates & Fees

Regular APR

18.49%-24.49% Variable APR

Intro APR

0% intro APR on purchases for 12 months from the date of account opening

Intro APR


Intro APR

0% intro APR on Purchases for 12 months

Recommended Credit Score
Recommended Credit Score
Recommended Credit Score

How do I pay myself as a sole proprietor?

Now that we understand how sole proprietorships work, let's learn how a sole proprietor would go about paying themselves. This will help us get a better idea of how much you should pay yourself as a sole proprietor.

In general, a sole proprietor can take money out of their business bank account at any time and use that money to pay themselves. If the business is profitable, the money in your account is considered your ownership equity and is the difference between your business assets and liabilities. This type of transaction isn't considered a salary, but rather a "draw." To perform a draw, you would write a business check to yourself. This check is not subject to federal income tax, state income tax, or FICA taxes.

That's because the IRS treats the business’s profits and a sole proprietor's personal income as the same thing. In other words, after you’ve deducted business expenses on Form 1040 Schedule C (for sole proprietors) or Form 1065 (for partners), the remaining profit is considered personal income.

However, you only file your personal income tax return once a year, and you may want to pay yourself on a more consistent basis. To do so, you'll need to look at financial projections (if you've just launched your business) or past financial performance (if you’ve been in business a while) and estimate your business's profits. Based on that number, you can set up a consistent salary for yourself. And if your business does better than expected, you can give yourself a quarterly or annual bonus, too.

How much do I pay myself as a sole proprietor?

As we said before, to determine how much to pay yourself as a sole proprietor, you need to figure out your projected business profits and the frequency with which you would draw from them.

In order to figure out your projected business profits, you need to keep accurate records of your business assets and liabilities. In other words, you can't mix personal and business finances, as this could make it more difficult to prove which expenses were for your business.

Because, as we mentioned above, you don't need to incorporate or register your sole proprietorship to start one, your business name defaults to your full legal name. In other words, in the eyes of the IRS, you and your business are the same entity. To differentiate between the two, you can file a DBA or "doing business as," which will allow you to do business under a name other than your own. Once your DBA has been created, you can then open a business bank account under that name. This is the account you will use for all business income and expenses. Your business bank statements will then offer a clearer picture of how much the business earned and spent.

If you wish to charge any business expenses, it also helps to get a separate business credit card. Finally, we recommend using business accounting software like QuickBooks to track business withdrawals and deposits, and the nature of the transactions.

Doing all of these things will make it easier to determine your projected profits. The other piece of the puzzle is figuring out how often you will draw from your sole proprietorship profits. This is more of a personal choice, and really depends on your personal preference. Some people may opt for a biweekly or once-a-month cadence, while others may choose a more or less frequent payment schedule. It ultimately depends on what you're comfortable with and your living expenses.

In general, there are two ways to determine your sole proprietorship salary when you are just starting out. You can either pay yourself based on the minimum you need to meet your basic living expenses (with no frills attached) for the first several months, or until the business breaks even, or what you are worth in the marketplace.

The second method is easier in the long run, because if you start out with a fair salary, you can keep paying yourself the same amount once your company becomes profitable. However, if your sole proprietorship can’t support paying you market worth, it’s okay to pay yourself the bare minimum until your business breaks even.

After that point, you can increase your take-home pay by giving yourself quarterly bonuses based on the company’s profitability. Once your business is showing steady profits, you can increase your salary.

How corporations differ from sole proprietors in terms of salary

If your business is not a sole proprietorship but is incorporated, things are a little different. Since you are an officer of your corporation as well as an employee on the payroll, you have to pay yourself a salary or wages, which must be “reasonable compensation” according to the IRS—neither too much nor too little.

Some business owners use the business’s money to pay their personal expenses without taking a salary in the belief this will save them on taxes. But this tactic can backfire and lead to substantial penalties if the IRS decides the money should have been taken as a salary.

If your business is a corporation, the best way to go is to determine the average rate for CEOs (or whatever your title is) in your industry, your region and for companies of similar size. You can get this information from your industry trade association, or from sites such as or

Keep in mind that salary and compensation can be complicated by factors such as whether your business has investors and how many shares of the business’s stock you own. Review the IRS’ guidelines and frequently asked questions about small business owners’ salaries, and consult with a business accountant before setting your salary.

The bottom line

In order to pay yourself as a sole proprietor, you need to have a clear picture of your business's projected profits, the money you need to live, and what you're going to pay in taxes. Keeping close track of your business finances will make all of this a whole lot easier. Also keep in mind that, as the business grows, you may reach a point where it makes more sense to change your business entity type to an LLC or corporation. If you do choose to change your business structure, you will have different guidelines around paying yourself.

As you start the process of choosing your business entity and deciding how and how much you'll pay yourself, it's always a good idea to consult a business account and lawyer to help ensure you're doing everything legally and in the best interest of your business.

One blue credit card on a flat surface with coins on both sides.
Smart money moves for your businessGet access to business insights and recommendations, plus expert content.
Sign up for free