Sole proprietor payroll: How to pay yourself quickly and easily

Being a sole proprietor means you are your business. You’re responsible for everything — from operations to finances — and that includes paying yourself. But unlike traditional employees or business owners with an LLC or corporation, sole proprietors don’t take a “salary” in the traditional sense.

So, how do you pay yourself properly while staying compliant with taxes and keeping your business finances in order? In this guide, we’ll walk you through the full process, including best practices, tax implications, and setting up a payment system.

How do sole proprietorships differ from other business structures?

Before you learn how to pay yourself, it’s important to understand a few important things about sole proprietorships, and how it affects payroll.

A sole proprietorship is the simplest business structure. It’s not a separate legal entity, which means:

• From a legal perspective, your business and personal finances are the same.

• You don’t get a paycheck or a W-2 form from your business.

• You report business income on your personal tax return.

This is different from an LLC, S Corp, or C Corp, where owners take salaries and file separate tax returns for the business.

Since you and your business are the same entity, you don’t pay yourself a salary in the way an employer would pay an employee. Instead, you withdraw money from your business profits, which we will explain below.

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How to pay yourself as a sole proprietor

To pay yourself as a sole proprietor, follow these steps:

1. Determine how much to pay yourself

Sole proprietors often struggle with deciding how much to pay themselves. Unlike traditional employees who receive a set salary, you must balance your personal financial needs, business cash flow, and tax obligations.

As a starting point calculate your business profits using the following formula: revenue - expenses - expected taxes.

For example, say you make $10,000 per month. If your expenses (e.g., subscriptions, materials, marketing etc.) total $3,000, and your expected taxes are 25% (around $1,750), this will leave you with profits of $5,250.

Next, consider your personal financial needs, such as bills, utilities, rent/mortgage, and other living costs. One widely-recommended approach is to follow the 50/30/20 rule, which stipulates:

• 50% for personal needs

• 30% for reinvesting in the business

• 20% for taxes

This ensures you’re paying yourself enough while still growing your business.

However, be sure to monitor your cash flow; if you withdraw too much, you may struggle to pay bills, reinvest, or survive slow months. It’s often advised to keep at least 3-6 months’ worth of business expenses in your account as a safety net.

Be aware of seasonality too, if this affects your business. If your income fluctuates, avoid paying yourself the maximum possible amount during peak months and, instead, take a lower, consistent amount each month to ensure financial stability.

2. Take an owner’s draw

Once you’ve decided how much to pay yourself, you’ll need to take an owner’s draw. An owner’s draw is when you transfer money from your business to your personal account, and works in the following way:

1. You transfer money from your business bank account to your personal bank account (usually through a bank transfer or a digital payment app).

2. You record the transaction in your accounting software or bookkeeping system.

Unlike a regular paycheck, there are no payroll taxes withheld on an owner’s draw. However, as mentioned, you’ll owe self-employment taxes on this income.

What are the tax implications of paying yourself?

When you pay yourself as a sole proprietor, the Internal Revenue Service (IRS) considers your business income as personal income. Unlike employees who receive a paycheck with taxes automatically withheld, you’re responsible for calculating and paying your own taxes, including:

Self-employment taxes

As a sole proprietor, you must pay a self-employment tax of 15.3%, which covers Social Security tax (12.4%) and Medicare (2.9%) (also known as FICA taxes).

This tax applies to your business’s net income, not just what you pay yourself. As a result, you must plan ahead.

Federal and state income taxes

In addition to self-employment tax, you must pay federal and state income tax. The percentage depends on your tax bracket and state tax rates.

Federal income tax rates range from 10% to 37% based on your total taxable income, while state (and local) income tax varies. Some states (like Texas and Florida) have no state income tax, while others (like California) have rates as high as 13.3%.

To see a full breakdown of potential taxes, check out our free US State Explorer tool.

Since taxes aren’t withheld from an owner’s draw, the IRS requires sole proprietors to pay these estimated taxes quarterly to avoid penalties. Payments are typically due on:

• April 15

• June 15

• September 15

• January 15 (of the following year)

Pro tip: Business expenses reduce taxable income, so keep track of deductible expenses like office supplies, travel, and marketing.

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Setting up a payment system

In terms of actually paying yourself, there are a few best practices to follow.

Even though your business isn’t a separate legal entity, it’s still advisable to open a business bank account to:

• Track income and expenses easily

• Make tax filing simpler

• Protect your personal assets

When you take an owner’s draw, move the money from your business account to your personal account through one of the following methods:

• Bank transfer

• Check

• A digital payment app, such as PayPal, Venmo, or Zelle (but be mindful of fees)

It’s also recommended to use an accounting tool like QuickBooks, Wave, or FreshBooks to help track your income and owner’s draws. This is particularly useful when filing your taxes, as well as if you are audited.

How can Remote help?

Paying yourself as a sole proprietor is simple but requires discipline. Use an owner’s draw, track your finances, and set aside taxes to stay compliant. By maintaining a clear financial system, you’ll ensure both personal and business success.

If you provide services to businesses, Remote’s Freelancer Hub can also help. It enables you to easily track all your invoices and manage all of your documents in one place, making it quick and painless to calculate your quarterly income.

To learn more about how Freelancer Hub can simplify your business management, speak to one of our friendly experts today.