How to pay yourself as the owner of your construction business

You have your business, but you do not know how to take money out of the profits. Do you pay yourself a salary? Do you transfer what is left over? This is a very common question among contractors.

The answer depends on how your business is set up (sole proprietor, LLC, or corporation). This guide is informational, not tax or legal advice. It explains the general picture and which forms are commonly used.

In short

• How you pay yourself depends on the structure: owner's draw, distribution, salary (W-2), or dividends.
• In a sole proprietorship or a single-owner LLC with no special election, you do not pay yourself a payroll salary: you take profit draws.
• In an S-Corp, if you work in the business, you must receive a reasonable salary through payroll before taking distributions. Distributions do not replace payroll.
• Taking money out doesn't mean that is your taxable income. In general, you pay taxes based on the business's profits.
• The books should show each draw, distribution or salary separately.

Two ways to get paid: profits and salary

As an owner, you can take money out in two ways. One is the business's profit. The other is a salary (wages) paid through payroll.

Not every structure allows both. That is why it is important to know which one you have.

Table: how the owner gets paid by entity type

The table is a general summary of IRS information (business structure types, single-member LLCs, Publication 541 for partnerships and S-Corp employees and shareholders). Forms depend on your case; confirm them with your tax preparer.

Entity type	How the owner receives money	Typical forms	What you should know
Sole proprietorship	Personal draw (owner’s draw)	Form 1040 with Schedule C and Schedule SE	Business profits are reported on your personal return, whether or not you withdrew them. You do not pay yourself a salary.
Single-member LLC	Personal draw (owner’s draw)	Form 1040 with Schedule C (or E, depending on the case) and Schedule SE	By default, the IRS treats it as part of the owner for income tax. You cannot be a W-2 employee of your own LLC in that case.
Multi-member LLC	Distributions according to the operating agreement; sometimes guaranteed payments	Form 1065 and Schedule K-1 for each partner	By default it is treated as a partnership. Each partner reports their share of the profit, even if they do not take it out. Guaranteed payments for services are treated differently from distributions.
Partnership	Distributions according to the agreement; sometimes guaranteed payments	Form 1065 and Schedule K-1	The partnership does not pay federal income tax; the partners report their share.
LLC or corporation with S-Corp election	Reasonable salary through payroll (W-2) plus distributions	Form 1120-S, W-2, payroll reports; shareholder Form 7203 when it applies	If you work in the business, the IRS expects a reasonable salary before distributions. Distributions do not replace payroll.
C-Corp	Salary (W-2) and, if decided, dividends	Corporation Form 1120, W-2, and 1099-DIV	The corporation pays tax on its profits and, if it pays dividends, the shareholder reports them on a personal return.
Qualified joint venture (spouses)	Each spouse reports their share	Form 1040 with two Schedule C (or F if agricultural)	It applies only if the IRS requirements are met. Ask your tax preparer.

Owner draws: sole proprietor and single-member LLC

An owner’s draw is money you move from the business account to your personal account. It is not a business expense or a salary.

According to the IRS, a single-member LLC with no election is treated as part of its owner for income tax purposes. That is why profits usually go on the owner's Schedule C and self-employment tax is calculated.

Example: a roofer with a single-owner LLC ends the year with $60,000 in profit. He took out $45,000. In general, reporting is based on the business's profit, not just on what you withdrew. Your tax preparer will tell you how it is calculated.

Distributions in a partnership or multi-member LLC

Each partner receives a share of the profits according to the agreement. IRS Publication 541 explains how partnerships are treated.

The partnership files Form 1065 and gives a Schedule K-1 to each partner. That document says how much each one must report. That is why a clear operating agreement helps a lot.

S-Corp: reasonable salary and distributions

The S-Corp is a tax election. A corporation or an LLC that meets the requirements can make it.

The IRS states that an S-Corp must pay a reasonable salary to a shareholder who provides services to it, before making distributions without withholding. If the pay is too low, the IRS can treat part of the distributions as salary.

There is no fixed formula. It looks at the work you do, the size of the business, and what is paid for similar work. A tax preparer can help you define it.

Also, payroll has its own paperwork and costs. A separate payroll service usually handles it. See our payroll support through partners.

And Form 7203

Form 7203 calculates the shareholder's basis in an S-Corp. It is used, for example, when you receive distributions that are not dividends or report losses. It is not the form used to pay a salary.

C-Corp: salary and dividends

A C-Corp is a separate entity. The IRS explains that the corporation pays taxes on its profits and the shareholder pays taxes on the dividends they receive. This is called double taxation.

The owner who works in the corporation can also receive a wage through payroll.

What to do now

• Confirm your structure and how the IRS will treat it.
• Decide with your tax preparer how you will pay yourself and how often.
• Use a bank account just for the business and transfer to your personal account with a clear note.
• Don't use the business card for personal expenses.
• Ask your bookkeeper to record withdrawals, distributions, and wages in separate accounts.
• Set money aside for taxes during the year.

When to talk to a professional

Talk to a tax preparer, CPA, or enrolled agent before choosing S-Corp, changing your structure, or setting your salary. For the operating agreement or legal matters, consult an attorney.

How ODC helps you

Oficina del Contratista keeps your books so your draws, distributions, and wages are recorded correctly. Learn about our bookkeeping for contractors service and read the guide to choosing your business structure. ODC does not prepare taxes or give tax advice.

References

1. IRS: Single member limited liability companies — tax treatment of a single-owner LLC.
2. IRS: S corporation employees, shareholders and corporate officers — reasonable salary and distributions in an S-Corp.
3. IRS: Publication 541, Partnerships — how partnerships and their partners are treated.
4. IRS: Business structures — comparison of structures, including the C-Corp.
5. IRS: Instructions for Form 7203 — S-Corp shareholder basis.

This article is for information and education only. It is not legal, tax or bookkeeping advice. We are a bookkeeping service: for tax matters, consult a tax preparer, CPA or enrolled agent.