What's the right way to pay myself from my construction company?
The right method depends entirely on how your business is structured. There is no single answer, and doing it wrong can mean overpaying taxes or drawing attention from the IRS.
If you operate as a sole proprietorship or single-member LLC, you don’t run payroll for yourself. You take owner draws directly from the business account. The full net profit of the business flows through to your personal tax return on Schedule C, and you pay self-employment tax on all of it. Simple to administer, but expensive on the tax side once your income grows.
If your construction company is taxed as an S-Corp, you need to pay yourself a reasonable salary through payroll before taking any additional money as distributions. The salary gets hit with Social Security and Medicare taxes just like any employee’s wages. But the distributions above that salary amount are not subject to those payroll taxes. For a construction business owner earning $150,000 in profit, the difference between taking it all as self-employment income versus splitting it into a $75,000 salary and $75,000 in distributions can save over $11,000 in payroll taxes annually.
The catch is that the IRS requires your salary to be “reasonable.” That means it should reflect what you’d pay someone else to do your job. A construction company owner who manages projects, handles estimates, supervises crews, and runs the business can’t pay themselves $30,000 and take $120,000 in distributions. The IRS looks at industry data, comparable salaries, and the scope of your responsibilities. For most Virginia construction company owners actively running the business, a reasonable salary typically falls somewhere between $60,000 and $100,000 depending on company size and your specific role.
C-Corp owners pay themselves a salary as a W-2 employee. You can also take dividends, but those get taxed twice: once at the corporate level and again on your personal return. Most small construction businesses avoid C-Corp status for this reason, though there are situations where it makes sense.
Regardless of entity type, never just transfer money from the business account to your personal account without recording it properly. Every draw, distribution, and payroll payment needs to be documented in your books. Sloppy owner pay records are one of the fastest ways to create problems with your accountant at tax time and with the IRS if you’re ever audited.
If you’re currently a sole prop or single-member LLC and your construction business is consistently profitable, talk to a tax professional about whether an S-Corp election makes sense. The payroll tax savings can be significant, but you’ll need to actually run payroll, file quarterly returns, and issue yourself a W-2 at year end. Our Northern Virginia small business bookkeeping services include payroll support for construction companies making exactly this transition.
The bottom line is that how you pay yourself should be a deliberate decision tied to your entity structure and tax strategy, not just pulling money out when you need it.
Northern Virginia's Bookkeeping & Advisory Firm
First Step:
Tell Us About Your Business
Every engagement starts with a conversation. Tell us what's going on with your books and we'll give you our honest assessment.
More Questions
How do dental and medical practices account for supplies and inventory?
Most small practices expense supplies when purchased under the cash method. Larger practices, especially dental offices with high-value materials like crowns and implants, may need perpetual inventory tracking to manage costs accurately.
Read answerHow should a Virginia law firm set up its IOLTA trust account bookkeeping?
Virginia law firms must maintain a separate interest-bearing IOLTA trust account with individual sub-ledgers for each client matter. Monthly three-way reconciliation is required, and the Virginia State Bar actively audits for compliance.
Read answerHow do contractors handle change orders in their books?
Approved change orders increase the total contract value and should be updated in the WIP schedule immediately. Unapproved change orders are riskier and need to be booked as unbilled receivables with a reserve if collection is uncertain.
Read answerHow should a medical practice handle bookkeeping for multiple locations or entities?
It depends on your entity structure. If each location is a separate LLC or PC, keep separate books for each and consolidate for owner reporting. If everything runs under one entity, use class or location tracking in QuickBooks or Xero to segregate financials by site.
Read answerHow do I bookkeep for a concierge or direct primary care practice?
Concierge and DPC practices run on membership revenue instead of insurance billing, which changes how you recognize income and manage receivables. The key is treating membership fees as deferred revenue and recognizing them monthly as services are delivered.
Read answerWhat's a certified payroll report and when is it required?
A certified payroll report (WH-347) is a weekly filing required on federally funded construction projects under the Davis-Bacon Act. It documents every worker's trade classification, hours, wages, and fringe benefits, and must reconcile with your general ledger payroll.
Read answer
