Can a Sole Proprietor Issue Himself a W-2?

Understanding how to get paid is a common challenge for new sole proprietors. The structure of a sole proprietorship has specific rules for owner compensation and tax obligations, dictating how money flows from the business to the owner for personal use and ensuring compliance with federal tax law.

The Sole Proprietor and Employee Distinction

A sole proprietor cannot issue themself a Form W-2 because the owner and the business are legally considered the same entity, meaning an individual cannot be their own employee. The W-2 is a document for employees, and since a sole proprietorship has no separate legal existence from its owner, this relationship does not exist.

An employee performs services for a separate legal entity that directs the work. A sole proprietor is the business itself and is classified as self-employed. Issuing a W-2 to oneself is forbidden by tax law and can lead to penalties. While a sole proprietor can hire other people as employees and issue them W-2s, the owner’s own compensation is handled differently.

How Sole Proprietors Pay Themselves

Instead of a salary, a sole proprietor pays themself through what is known as an “owner’s draw.” An owner’s draw is a direct withdrawal of funds from the business’s profits for personal use. This is accomplished by writing a check from the business bank account to the owner or by transferring funds to a personal account. Maintaining a separate bank account for the business is important to avoid commingling funds and to create a clear record of all transactions.

Unlike a salary, an owner’s draw is not a business expense and does not appear on the business’s profit and loss statement. Instead, it is recorded in the business’s accounting records as a reduction in the owner’s equity. There are no set rules for how often or how much a sole proprietor can take as a draw; it can be done on a regular schedule or as needed, depending on the business’s cash flow.

Tax Responsibilities for Sole Proprietors

Because no taxes are withheld from an owner’s draw, the sole proprietor is personally responsible for paying taxes on the business’s profits. The entire net profit, not just the amount taken in draws, is subject to self-employment and income tax. All business income and expenses are reported on Schedule C, “Profit or Loss from Business,” which is filed with the owner’s personal Form 1040 tax return.

The net profit calculated on Schedule C is subject to self-employment tax, which covers both the employee and employer portions of Social Security and Medicare taxes. This tax is calculated on Schedule SE, “Self-Employment Tax.” The tax rate is 15.3% on 92.35% of net earnings, composed of a 12.4% Social Security tax on earnings up to an annual limit ($176,100 in 2025) and a 2.9% Medicare tax on all net earnings.

To meet these tax obligations, sole proprietors are required to make quarterly estimated tax payments to the IRS. These payments are due in April, June, September, and January of the following year. The deadline is the 15th of the month, but if that date is a weekend or holiday, the payment is due on the next business day.

Alternatives for Receiving a W-2 Salary

For business owners who prefer receiving a regular salary and having taxes withheld, changing the business’s legal structure is the necessary path. Forming a separate legal entity, such as a corporation, allows the owner to become an employee of that new entity. The two most common corporate structures for this purpose are the S Corporation and the C Corporation.

With an S Corporation, the owner can be put on the payroll and must be paid a “reasonable salary” for their work. This salary is subject to FICA taxes (Social Security and Medicare), with the corporation paying the employer’s portion. Any remaining profits can be distributed to the owner as distributions, which are not subject to self-employment taxes. A C Corporation also allows an owner to be a salaried employee, but this structure can lead to double taxation, where profits are taxed at the corporate level and again when distributed as dividends.