How should you pay yourself from your trades business?
By Doug Johnson, CPA - Updated August 2026
Short answer: it depends entirely on your entity type. Sole proprietors and single-member LLC owners take draws. S-corp owners take a W-2 salary plus distributions. Partners in a partnership (that's not taxed as an S-corp) take guaranteed payments plus distributions. Each structure has its own tax mechanics, paperwork, and traps - and using the wrong pay method for your structure is one of the most common errors we see in trades businesses. Fortunately, it's also something we can fix. Here's a rundown of how each entity structure impacts owner payment.
You're taxed on overall profit, NOT on what you take out
Before we get into structures, one piece of mechanics that trips up almost every new business owner: unless you're a C-corp (which is rare, and typically not a good tax option for most trades businesses) you pay tax on your business's net profit, not on the money you move to your personal account.
If your plumbing business nets 150K and you only drew 60K, you're still taxed on 150K. The draw itself never touches your tax return - it's treated as though you're just moving your own money around between accounts. This is probably the single most common misconception we see from business owners around their own pay.
Sole proprietor or single-member LLC: owner draws
If you're a sole prop or a single-member LLC (taxed the same way by default), you pay yourself by transferring money out of the business - an owner's draw. There's no payroll to run and nothing gets withheld.
Here's how tax gets assessed. Your net profit flows onto your personal return via Schedule C, and you pay tax in two layers - regular income tax, plus self-employment tax of 15.3% (12.4% Social Security + 2.9% Medicare) on roughly 92.35% of your net profit. Fortunately, the 12.4% Social Security piece is capped at $184.5K of earnings for '26. The 2.9% Medicare piece never stops, and an extra 0.9% kicks in above $200K (single) / $250K (married filing jointly) - so the ongoing rate above the wage base is 2.9 - 3.8%. Half of your SE tax comes back as a deduction, which softens the blow a bit.
Because nothing is withheld from a draw, you're on the hook for quarterly estimated taxes - and failure to keep estimated taxes in mind is what leads to a nasty tax bill come filing time. Unfortunately, we see this all too often with new clients - so anytime we bring on a new business, one of our first action items is to make sure we get them set up to make regular estimated tax payments.
S-corp: reasonable W-2 salary + distributions
An S-corp flips the setup: you become a W-2 employee of your own company. You pay yourself a "reasonable" salary through actual payroll (with payroll taxes withheld, which land in basically the same place as SE tax), and you take additional profit out as shareholder distributions - which do NOT face self-employment tax. That gap is where the savings come from.
The catch is the word reasonable. The IRS will not let you pay yourself a token 20K salary while distributing 180K - your salary has to reflect what you'd pay someone else to do your job, and your business has to be able to afford it. In the event of an audit, an unreasonably low salary is going to be one of the first things the auditor looks at - and if they determine the salary is too low, that typically means you're going to face an assessment for back payroll taxes (plus penalties and interest).
For most trades businesses, an S-corp starts to make sense at around 100K of consistent net profit or more - below that, the added costs (payroll service, a separate business return, tighter bookkeeping, more admin) tend to outweigh the savings. Consistency in your business is also big: one great year isn't enough, because unwinding an election is a massive pain that typically requires you to scrap your entity and start a new one.
To help determine whether an S-corp makes sense, we build out individualized models for all clients before making a recommendation. We've seen too many "vibes-based" elections - our analysis helps make the decision data-driven.
Partnership: guaranteed payments + distributions
If you and a partner own the business together (a multi-member LLC by default), neither of you takes a W-2 paycheck. Partners pay themselves through guaranteed payments (fixed amounts for services, deducted by the partnership) and partner distributions - and your share of partnership profit is generally subject to self-employment tax, similar to a sole prop. Again - in keeping with the idea that you're taxed on profit, not what you draw - keep in mind that you'll be taxed on your percentage of the partnership's overall income, regardless of whether you take distributions or not.
Paying W-2 wages to a partner is a common error - partners generally can't be employees of their own partnership, and running one through payroll creates reporting problems with the IRS that are annoying to unwind. If you've made this error already, flag it with your CPA as soon as you can - that's an issue that should be corrected as soon as possible.
FAQ
Can I just take money out whenever I want? Mechanically, yes - it's your business. Do note, though, that every draw should be tracked, and for an entity like an S-corp, distributions wildly out of proportion to your salary invite scrutiny. Take pay on a regular schedule and your books and your tax planning both get a lot cleaner. For help with this, it can also help to engage an outside firm for bookkeeping (our firm offers this as part of a full-service tax/bookkeeping/advisory package).
Do I pay less tax if I leave the profit in the business? Nope - for sole props, partnerships, and S-corps alike, you're taxed on profit whether you take it out or not. Leaving cash in the business is often smart for other reasons (working capital, equipment), but it doesn't reduce this year's tax bill.
How much should I set aside from each draw for taxes? As a rough starting point, 25 - 35% of net profit covers federal income tax plus SE tax for most trades owners. State taxes will be in addition to that figure, and this amount can vary wildly by state (some states have no tax at all, others like California and New York have high tax rates). Your actual number depends on your bracket and state - this is exactly what quarterly estimate calculations are for.
Can my spouse be on payroll? Yep, if they do real work for the business - and it can open up benefits like retirement plan contributions. It has to be genuine work performed for a reasonable rate, though, and needs to be documented like any other employee's work - that's what holds up in the event of an audit.
Related: Why Is My Trades Business Profitable on Paper but Broke in the Bank? · Can I Write Off My Work Truck? A Contractor's Guide to Vehicle and Equipment Deductions
Doug Johnson, CPA is the owner of Doug Johnson CPA, a tax and accounting firm serving specialty trades and home services businesses nationwide. Questions about your setup? Book an intro call.