How to Pay Yourself as the Owner of a Childcare Business

Figuring out how to pay yourself as a childcare owner is one of the most important financial decisions you’ll make. The pay yourself childcare owner question — draw or salary — affects your taxes, your cash flow, and the long-term health of your business. In this guide, we walk through both options, when each makes sense, and the simple rules that keep you out of trouble with the IRS. Read on to find out more.

Draw Versus Salary: The Two Main Ways to Pay Yourself

As a small business owner, you’ll generally choose one of two methods to compensate yourself from your childcare business.

• Owner’s draw — You take money out of the business bank account for personal use. Some owners draw on a regular schedule. Others draw as needed.
• Salary — You set a reasonable wage for yourself and run a paycheck through your business payroll on a regular cycle.

Which option is right for you depends partly on your entity type. Sole proprietors and most LLCs use a draw. S-corp owners are required to take a reasonable salary. C-corp owners typically run a salary too. The IRS overview on paying yourself is a good starting reference, and our guide on choosing the right business structure for your childcare business dives deeper into how entity choice shapes this decision.

Advantages and Disadvantages of an Owner’s Draw

Advantages

• Flexibility. You can dip into the business account when you need to instead of waiting for a pay cycle. Some owners love the freedom.

Disadvantages

• The flexibility cuts both ways. Without a set wage, it’s easy to overpay yourself on a busy month and underpay on a slow one.
• Irregular withdrawals reduce business equity. Less cash sitting in the business means less working capital for staffing, supplies, and growth.
• Tax surprises. Depending on your entity, draws may be subject to self-employment tax. Sole proprietors and most LLC members pay SE tax on every dollar of profit per the IRS Self-Employment Tax Center. If you don’t set money aside, you can owe the IRS far more than expected at year-end.

Advantages and Disadvantages of a Salary

Advantages

• Stable, predictable income. A salary paid through payroll lands at the same intervals every time — weekly, biweekly, or monthly. As a result, you can budget at home and at work.
• Cleaner books. Your wage shows up as a payroll expense, so you can see the true profit of the business after you’ve been paid.
• Less administrative work. Income taxes are withheld automatically. You don’t have to scramble at tax time to figure out whether you set aside enough for self-employment taxes.
• Better paper trail. Regular paychecks help when you apply for a mortgage, a vehicle loan, or a business line of credit.
• Easier S-corp planning. If you’re taxed as an S-corp, a payroll salary is required — and pairing it with the right strategy can interact with the QBI deduction.

Disadvantages

• Reasonable compensation rules. Your salary needs to fall within IRS guidelines for reasonable compensation. The IRS reasonable compensation guidance is the starting point. As a result, you’ll need to do real research — or work with an accountant — to set the right number for your role.

How to Pay Yourself as a Childcare Owner: Our Recommendation

For most childcare owners, we recommend paying yourself a salary through payroll. The advantages outweigh the disadvantages and protect you from the most common mistakes owners make with draws.

Here’s the simple framework we use with clients:

1. Pick the right entity first. First, confirm your business structure supports the pay method you want.
2. Set a reasonable wage. Next, benchmark director-level childcare pay in your market and set a defensible salary.
3. Run it through payroll. Then automate it. A reliable childcare payroll processing solution handles withholdings and filings for you.
4. Top up with draws when cash allows. Finally, if profits exceed plan, you can take additional draws on top of salary.

Salary Plus Occasional Draws

If the business outperforms, you’re not limited to salary alone. You can take additional draws on top when there’s excess cash. Just remember: those draws aren’t running through payroll withholdings. As a result, set aside 15–20% of any draw for the income tax you’ll owe on it.

If You Choose Draws Only

If a draw-only approach makes more sense for your structure, set yourself up for success with discipline:

• Stick to a strict draw schedule — regular intervals, regular amounts.
• Treat it like the salary you would have paid yourself.
• Set aside 15–20% of every draw to cover Social Security, Medicare, and income tax.
• Track every transaction so you can see income and expenses cleanly.

The U.S. Small Business Administration has a quick primer that’s worth a read alongside this one.

Get Help Paying Yourself the Right Way

Do you need help figuring out the right wage for you as a childcare owner? Want to hand off payroll processing to someone you trust? The experts at Honest Buck Accounting are here to help. Call us today to learn how we can meet your business’s accounting needs and help you grow.