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.
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