For single-member LLCs and solo business owners, how you pay yourself is one of the most important financial decisions you’ll make. While taking an owner’s draw may seem simple, moving to a payroll setup—especially by electing S corp status—offers significant advantages both today and for your future. Here’s why putting yourself on payroll can be a game-changing move, backed by a breakdown using a $100,000 annual salary example.
Owner’s Draw vs. Payroll: Understanding the Basics
Owner’s Draw
Traditionally used by sole proprietors and single-member LLCs.
You “draw” money from the business as needed.
The entire business profit is subject to income tax and self-employment tax (Social Security and Medicare at a rate of 15.3%).
Less paperwork but limited access to payroll-based benefits.
Payroll (S Corp)
Available if you elect S corporation tax treatment.
You pay yourself a “reasonable” salary through payroll.
Payroll taxes (FICA) are withheld automatically for Social Security and Medicare; profits above your salary can be distributed as dividends, which aren’t subject to self-employment tax.
Unlocks a suite of tax advantages and benefit eligibility for owners.
Tax Advantages: The $100,000 Example
Suppose your company earns $100,000 of profit. Here’s how the two methods compare:
Compensation Type | Taxable for Social Security & Medicare | Amount Subject to Payroll Taxes | Payroll Tax Paid (15.3%) |
|---|---|---|---|
Owner's Draw | Full Profit | $100,000 | $15,300 |
S Corp Payroll | Salary Only | $60,000 | $9,180 |
Owner’s draw: You pay self-employment tax on the full $100,000, totaling $15,300.
Payroll/S Corp salary: If you pay yourself the entire $100,000 as salary, you and the company combined pay the same payroll tax. However, the advantage becomes clear when you split your income—for example, taking $60,000 as a salary and $40,000 as S corp dividends, where only the salary is subject to payroll taxes, saving $6,120 in self-employment taxes on the distribution ($40,000 × 15.3%).
Long-Term Tax Benefits and Financial Security
Opting for a payroll setup enables:
Social Security Credits: Every paycheck builds your eligibility for future Social Security retirement and disability benefits, supporting long-term financial security.
Retirement Account Eligibility: Salary income allows for generous contributions to solo 401(k), SEP IRA, and other workplace retirement plans—maximizing your tax-deferred savings each year.
Health Insurance Deductions: As an employee, some health insurance premiums can be deducted from your salary, lowering your taxable income for both payroll and income taxes.
Unemployment and Disability Benefits: Payroll participation often qualifies you for state-run unemployment and disability insurance benefits, providing crucial protection against loss of income.
Access to Loans & Professionalism: Regular pay stubs from payroll improve your ability to qualify for mortgages and other financing, and support a more professional business image.
Additional Advantages
Tax Automation & Compliance: Payroll software automatically withholds proper tax amounts, reducing risks associated with underpaying estimated taxes and IRS penalties.
Predictable Cash Flow: Salary payments provide consistent income and make cash flow management simpler.
Scalable Tax Savings: As your business income exceeds a reasonable salary threshold, converting additional profits to distributions can lead to thousands in yearly tax savings—compounding as your company grows.
When is Owner’s Draw Appropriate?
Simpler to administer and flexible for fluctuating income.
Suitable for businesses just starting or with variable profits.
However, it misses out on payroll-based benefits and tax-savings once profits grow.
The Bottom Line
Switching to payroll—especially through S corp election—offers owners and single-member businesses tangible tax benefits, enhanced access to long-term financial programs, and scalability as the business grows. Paying yourself via payroll means lower overall taxes on higher profits, greater personal financial security, and a more professional, compliant business.
Consult a qualified tax advisor before making changes to your compensation method to ensure it fits your specific business profile and goals.
By putting yourself on payroll, you’re investing in your business’s future stability—and your own.
About Rollfi
Rollfi empowers banks, vertical SaaS platforms, accounting firms, and fintechs to add payroll and benefits to their offerings through white-label solutions and robust APIs. With Rollfi’s infrastructure, platforms can unlock new revenue, boost customer retention, and gain valuable payroll data insights. Fast deployment and full regulatory coverage make Rollfi the easiest way to turn your platform into a one-stop shop for essential business services.
For single-member LLCs and solo business owners, how you pay yourself is one of the most important financial decisions you’ll make. While taking an owner’s draw may seem simple, moving to a payroll setup—especially by electing S corp status—offers significant advantages both today and for your future. Here’s why putting yourself on payroll can be a game-changing move, backed by a breakdown using a $100,000 annual salary example.
Owner’s Draw vs. Payroll: Understanding the Basics
Owner’s Draw
Traditionally used by sole proprietors and single-member LLCs.
You “draw” money from the business as needed.
The entire business profit is subject to income tax and self-employment tax (Social Security and Medicare at a rate of 15.3%).
Less paperwork but limited access to payroll-based benefits.
Payroll (S Corp)
Available if you elect S corporation tax treatment.
You pay yourself a “reasonable” salary through payroll.
Payroll taxes (FICA) are withheld automatically for Social Security and Medicare; profits above your salary can be distributed as dividends, which aren’t subject to self-employment tax.
Unlocks a suite of tax advantages and benefit eligibility for owners.
Tax Advantages: The $100,000 Example
Suppose your company earns $100,000 of profit. Here’s how the two methods compare:
Compensation Type | Taxable for Social Security & Medicare | Amount Subject to Payroll Taxes | Payroll Tax Paid (15.3%) |
|---|---|---|---|
Owner's Draw | Full Profit | $100,000 | $15,300 |
S Corp Payroll | Salary Only | $60,000 | $9,180 |
Owner’s draw: You pay self-employment tax on the full $100,000, totaling $15,300.
Payroll/S Corp salary: If you pay yourself the entire $100,000 as salary, you and the company combined pay the same payroll tax. However, the advantage becomes clear when you split your income—for example, taking $60,000 as a salary and $40,000 as S corp dividends, where only the salary is subject to payroll taxes, saving $6,120 in self-employment taxes on the distribution ($40,000 × 15.3%).
Long-Term Tax Benefits and Financial Security
Opting for a payroll setup enables:
Social Security Credits: Every paycheck builds your eligibility for future Social Security retirement and disability benefits, supporting long-term financial security.
Retirement Account Eligibility: Salary income allows for generous contributions to solo 401(k), SEP IRA, and other workplace retirement plans—maximizing your tax-deferred savings each year.
Health Insurance Deductions: As an employee, some health insurance premiums can be deducted from your salary, lowering your taxable income for both payroll and income taxes.
Unemployment and Disability Benefits: Payroll participation often qualifies you for state-run unemployment and disability insurance benefits, providing crucial protection against loss of income.
Access to Loans & Professionalism: Regular pay stubs from payroll improve your ability to qualify for mortgages and other financing, and support a more professional business image.
Additional Advantages
Tax Automation & Compliance: Payroll software automatically withholds proper tax amounts, reducing risks associated with underpaying estimated taxes and IRS penalties.
Predictable Cash Flow: Salary payments provide consistent income and make cash flow management simpler.
Scalable Tax Savings: As your business income exceeds a reasonable salary threshold, converting additional profits to distributions can lead to thousands in yearly tax savings—compounding as your company grows.
When is Owner’s Draw Appropriate?
Simpler to administer and flexible for fluctuating income.
Suitable for businesses just starting or with variable profits.
However, it misses out on payroll-based benefits and tax-savings once profits grow.
The Bottom Line
Switching to payroll—especially through S corp election—offers owners and single-member businesses tangible tax benefits, enhanced access to long-term financial programs, and scalability as the business grows. Paying yourself via payroll means lower overall taxes on higher profits, greater personal financial security, and a more professional, compliant business.
Consult a qualified tax advisor before making changes to your compensation method to ensure it fits your specific business profile and goals.
By putting yourself on payroll, you’re investing in your business’s future stability—and your own.
About Rollfi
Rollfi empowers banks, vertical SaaS platforms, accounting firms, and fintechs to add payroll and benefits to their offerings through white-label solutions and robust APIs. With Rollfi’s infrastructure, platforms can unlock new revenue, boost customer retention, and gain valuable payroll data insights. Fast deployment and full regulatory coverage make Rollfi the easiest way to turn your platform into a one-stop shop for essential business services.