If you elect to organize your company as a corporation, how you pay yourself is handled differently than with a partnership or sole proprietorship. With the corporate structure, you get to pay yourself a salary and any additional profits will be paid out as dividends. The rules are set up so you pay the correct taxes on your self-employment income, even though your business is a corporation.

S Corporation Profits

The typical small business corporation is an S corporation rather than a C corporation. The S corporate structure allows profits to be passed through to shareholders in the corporation without being taxed at the corporate level. A C corporation must pay taxes on the corporate income, and then profits paid to shareholders as dividends are taxed again on the owner's individual income tax returns. S corporation profits that are paid to shareholder/owners are classified as dividend payments.

Pay Yourself a Salary

If you are an S corporation owner and work in the business, the tax rules require the corporation to pay you a reasonable salary for your services. Along with the salary, the company will pay the employer portion of Social Security and Medicare taxes. The employee portion of these taxes will be withheld from your paychecks. How much of a salary you pay yourself is flexible as long as you can show the Internal Revenue Service that the compensation is appropriate for someone doing the same type of work.

Profits Paid as Dividends

The net profits of an S corporation are paid out to shareholders as dividends. The amount of dividend an owner receives depends on the percentage of the total shares she owns. If you are the sole owner and shareholder of your corporation, you can make regular dividend payments to yourself in addition to being paid your corporate salary. Used this way, the dividends resemble the draw paid to partners in a partnership. However, payments classified as a draw are not allowed with the corporate business structure.

Tax Considerations

The big difference between your salary and dividends are the Social Security and Medicare taxes. These taxes total an additional 15.3 percent on the salary you take -- up to $113,700 -- at the time of publication. These taxes are not paid on the dividends from your corporation. The IRS wants to make sure the salary level is reasonable compensation, so these taxes are paid on your income. If your business was a partnership or sole proprietorship, the same tax percentage is collected on net income and called self-employment tax. The salary plus dividends compensation plan allows you to pay fewer taxes than if you did not have the corporate structure.