How to Pay Yourself as a Business Owner

Entrepreneur at a computer, illustrating how to pay yourself as a business owner

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Amanda Cardoso
Amanda Cardoso
May 19, 2024 at 2:0AM UTC

As an entrepreneur, it can be tough to think about your own payment when there are so many other pressing needs. Your team's salary, rent, utilities, and everything else that keeps the business running always seems to come first. But, at some point, you have to start enjoying the fruits of your work and figure out how to pay yourself as a business owner.

This decision hinges on several factors, like the business structure, financial performance, and expenses. It's important to sit down and craft a sensible strategy to ensure that the company can sustain itself.

Going through this process can be daunting, especially for sole proprietors who don't have anybody to share the responsibilities with. To take some weight off your back, we've put together a guide on when and how to pay yourself as a business owner, taking into consideration different business structures.

When to start paying yourself from your business

You should start paying yourself when your business becomes financially stable. In simpler terms, this means generating enough income to cover all the company's expenses, including any debts, loans, and labor costs, and still having some profit left over.

As tempting as it may be, focusing on paying yourself before seeing relevant profitability can affect the maintenance of the company and the economic health of your business. “One of my hardest but smartest moves was reinvesting a huge chunk of profits back into my company during those first few years rather than paying myself more,” says Misti Morgenstern, founder of Elevate Event Staff. “This allowed us to scale and grow at a faster rate.”

How to pay yourself as a business owner

If your business is in a favorable financial position—so good that you can start paying yourself—here's how you can do it: 

Choose between draws or salary

As a business owner, you can pay yourself with an owner's draw or a salary. There's no right or wrong choice; the better option depends on your company's specific structure and your own preferences. Before making a decision, evaluate the pros and cons of each payment method:

  • Owner's draw: This is a payment method that lets you transfer a portion of business profits directly to your bank account. You can pay yourself instantly and adjust the amount as the business grows and your needs change. 

Another advantage of the owner's draw is that it's not subjected to payroll taxes. However, you'll need to be responsible for arranging your own payment and paperwork related to your social security, for example, which can add to your other responsibilities.

  • Salary payment: With this payment method, you'll add yourself to the company's payroll and receive a predetermined amount of money monthly or weekly, just like any other employee. 

When you pay yourself a salary, you have more control over the cash flow and business health. One downside of this system is that your wage is subject to payroll taxes. But on the other hand, you can reduce your annual tax payments by treating your salary as one of your company’s business expenses.

Consider you business structure

Is your company a corporation or a partnership, or are you a sole proprietor? Your business structure and operating agreement are also determining factors in how much you can pay yourself. Besides, as you may already know, your tax payments also vary according to these categories.

“For example, in many partnerships, each owner is paid a percentage according to their investment,” says Michael Ashley, business and finance expert, and the founder of Ashley Insights. “Owners in these structures need to adhere to legal and tax requirements when determining their compensation.”

Sole proprietor: You have 100% control over the payment method since there's no one to share the profits with. For sole proprietors, income tax payments either fall under simplified tax filing or self-employment taxes.

  • Simplified tax filing: Your business income and expenses are reported on your personal tax return. 

  • Self-employment tax: You pay self-employment taxes, which cover Social Security and Medicare taxes, and the amount is based on your business income.

Partnership: In this business structure, partners can share the business profits based on previous agreements. For instance, you can split them equally or base the amount you receive on each partner's contribution to the business. For partnerships, the tax payment is either a partnership tax return or pass-through taxation.

  • Partnership tax return: You file an information tax return, reporting income, deductions, and distributions, but the partnership itself doesn't pay income taxes.

  • Pass-through taxation: Each partner will report their share of the income on their individual tax return.

Corporation: If you're a corporation, you have the option of paying yourself a salary by setting an employment agreement with the company, or receiving dividends. Unlike a salary, dividend payments are based on your ownership percentage. As a corporation, you may pay corporate tax return, corporate tax rates, or face double taxation.

  • Corporate tax return: Corporations file a separate tax return reporting their income, deductions, and expenses.

  • Corporate tax rates: Corporations are bound to tax rates that can vary based on their taxable income.

  • Double taxation: If you're in a corporation and share dividends with shareholders, these dividends will be taxed again on each individual tax return.

How much to pay yourself as a business owner

According to Pay Scale, the annual salary of a business owner in the U.S. ranges from $31,000 to $145,000, with an average of $69,674 in 2024. This variation shows that there's no fixed amount that is reasonable or correct for you to receive—it depends on the context.

Sole proprietorship

As a sole proprietor, it's important to stick with a consistent payment method and choose an affordable amount. “One great approach is to set a reasonable salary based on industry standards, your business's profitability, and your personal financial needs,” Ashley says.

To understand how profitable your business truly is, take a moment to analyze your income statements from the past year. “Look into your business's revenue and profitability to determine how much compensation it can afford,” he adds. 

For added security, also think about setting aside a percentage of your profits to cover potential business-related emergencies. 

Partnerships and corporations

If you're part of a partnership or corporation, base your financial decisions, including your payment, on revenue and profits. Keep in mind that, in a partnership, partners also get a slice of the profits, so make sure the amount set for each one is affordable and won't harm the business.

In corporations, if you want regular compensation, you'll need to establish a fixed and affordable salary based on revenue and profitability. “Since Elevate is a corporation, not a sole proprietorship, my compensation approach is more formalized,” says Morgenstern. “I pay myself a salary through payroll like any other employee, subject to withholdings.”

It's also worth noting that in some corporations, such as Morgenstern's, shareholders typically have a say in potential bonus payments. “Our board has a voice in approving any bonus or dividend compensation tied to company performance and my ownership stake,” she says.

What not to do when paying yourself 

Whether you're a small business owner or a more established one, some financial decisions are never wise. Here's what to avoid while paying yourself as a business owner:

Don't mix personal and business accounts

A common mistake many business owners make is combining their personal and business accounts, which can lead to a loss of control over cash flow and various other problems, such as “accounting errors, tax implications, and difficulty tracking business performance,” says Ashley.

Even if you're the sole proprietor and profits are going directly into your own pockets, you should always have a personal account to make sure finances don't get mixed.

Don't overpay or underpay yourself

Taking too much money out of your business as payment would be a mistake for obvious reasons. You could end up in debt or find yourself without funds for emergencies, supplies, or unexpected expenses. 

“A key mistake I avoid is taking irregular or excessive draws that could jeopardize our cash flow runway. I'm also diligent about setting aside funds to cover the income tax liability from my salary and any draws,” Morgenstern says.

However, it's also not ideal to underpay yourself when your business is stable enough for a fairer compensation. “Business owners need to create a balance between fair compensation and correct financial management,” Ashley says, “which can be the key to ensuring the long-term success of both the business and personal finances.”

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