How Much Should Business Owners Pay Themselves?

Know Your Business Structure

The way you pay yourself depends a lot on how your business is set up:

• Sole Proprietorship: You and your business are basically the same thing financially. Profits are your income, and you can take money out whenever you want—but don’t forget to save for taxes!
• LLC (Limited Liability Company): An LLC separates you from your business legally, which offers some protection. Depending on how your LLC is set up, you might pay yourself through a salary or an owner’s draw.
• Corporation: This one’s a bit more formal. You’re considered an employee of your business, so paying yourself a salary is usually the way to go.

Decide How You’ll Get Paid

Once you’ve nailed down your structure, it’s time to figure out your pay style:

• Salary: A consistent paycheck is great for personal budgeting and creates clear boundaries between your finances and the business.
• Dividends: If you’re a shareholder, dividends let you take a share of the profits without dealing with payroll. Bonus? They’re often friendlier as it relates to taxes. Just keep in mind that dividends only work if your business is making a profit.
• A Mix of Both: Lots of business owners go with a combo—taking a smaller salary for stability and dividends when the business does well. It’s flexible but requires some careful planning to avoid tax surprises.

Do the Math

Here’s how to figure out what you can afford to pay yourself:

1. Look at Your Profit: Start with how much your business makes after covering all expenses.
2. Save for Taxes: Put aside 20-30% for taxes so you’re not caught off guard.
3. Plan for Reinvestment: Decide how much you’ll reinvest into growing your business—whether it’s new tools, marketing, or expansion.
4. Find Your Take-Home Pay: Whatever’s left is what you can pay yourself. Adjust as needed between salary, dividends, or a mix of both.

Keep Records

Keep a record of what you pay yourself and how often. Not only does this make tax season less stressful, but it also comes in handy if you’re ever applying for a loan or seeking investors.

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