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Should a small agency owner pay themselves a salary or draw?

The answer depends entirely on how your LLC is taxed. That single detail determines whether you take draws, pay yourself a salary, or do both.

If your agency is a single-member LLC and you’ve never filed an S-Corp election, it’s taxed as a sole proprietorship by default. In that case, you take owner’s draws. You cannot pay yourself a W-2 salary. All of your net business income flows through to your personal tax return, and you pay self-employment tax (15.3% for Social Security and Medicare) on the full amount. The draw itself isn’t a separate taxable event. It’s simply you moving money from the business account to your personal account. Multi-member LLCs work similarly but are taxed as partnerships by default, with partners taking guaranteed payments or distributions rather than W-2 wages.

If your LLC has elected S-Corp taxation by filing Form 2553 with the IRS, the rules change. You’re required to pay yourself a reasonable W-2 salary before taking any additional money out as distributions. The IRS specifically watches for S-Corp owners who set their salary artificially low to dodge payroll taxes. “Reasonable” means what you’d realistically pay someone else to do your job in your market and geographic area.

The tax advantage of the S-Corp route is that only the salary portion gets hit with payroll taxes. Distributions above your salary avoid them. So if your agency nets $100K and you pay yourself a $55K salary, you save roughly $6,900 in self-employment tax on the $45K you take as distributions. That’s real money.

But S-Corp status comes with added costs. You need to run payroll for yourself, which means payroll software or a service. You file a separate S-Corp tax return (Form 1120-S) each year. There are additional compliance requirements. Those costs typically run a few thousand dollars a year, which is why the S-Corp election usually doesn’t make sense until your net income consistently exceeds about $70K. Below that threshold, the administrative overhead can eat up most or all of the tax savings.

For creative agency owners specifically, income can be unpredictable. Project-based work means some months are flush and others are tight. If you elect S-Corp status, you still need to pay yourself through payroll on a regular schedule regardless of how cash flow looks that month. Before making the election, make sure your revenue is stable enough to sustain a consistent salary.

Here’s what to do right now. Check how your LLC is currently taxed. If you’ve never filed Form 2553, you’re a sole proprietorship or partnership by default and draws are your only option. If your net income has been running above $70K for a year or more, talk to your accountant about whether an S-Corp election makes sense. If you’re already an S-Corp, make sure your salary is set at a defensible level and that payroll is actually being processed correctly with proper tax withholdings.

One thing that helps with this decision is having accurate books that show your real net income over time, not just your bank balance. Knowing whether you’re actually clearing $70K or $90K or $50K in profit makes the salary-versus-draw question much easier to answer. Wisconsin small business bookkeeping services that give you clean monthly numbers put you in a position to make this call with confidence rather than guessing.

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Small business bookkeeping firm based in Beaver Dam, Wisconsin. Bookkeeping, financial strategy, and fractional CFO services built around helping owners understand their numbers and plan ahead. Founded by Laura Prater, a QuickBooks Certified ProAdvisor with over a decade of accounting experience.

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