How to Pay Yourself as a Business Owner: A Simple Guide

Key takeaways

• Pay yourself consistently so your books reflect your true costs and cash flow.
• Choose between an owner’s draw and a salary based on your business structure.
• Set your pay high enough to cover your living expenses without draining business cash flow.
• Run a reasonable salary through payroll if you own an S corporation or C corporation.

Why paying yourself as a business owner matters

Owner compensation is the pay you take from your business for your own work. It matters because skipping it hides your true costs, strains your cash flow, and puts your personal finances at risk.

Many small business owners quietly underpay themselves. When times are tight, they tend to pay vendors, utilities, and rent before they take home their own paycheck.

Skimping on your own salary can come back to haunt you. If you don’t set aside funds for your pay, your books won’t reflect your company’s true financial health. That makes it harder to know when to cut costs or raise prices.

Predictable expenses also make cash flow easier to manage, and your salary is one of them. Adequate cash flow is vital for any business, and it is far easier to plan for when your own pay is part of the picture.

Most importantly, you’re still a hardworking individual who deserves adequate compensation in exchange for your time and labor. But there’s also a pragmatic reason to pay yourself. Depending on the structure of your company, it’s possible to get a tax break if you set aside a personal salary out of your total business income. Delaney Tax & Wealth Management founder Whitney Delaney explains, “Let’s say you’re making a net income of $100,000 a year in your business, and you file as a sole proprietor: Self-employment tax – which consists of Social Security and Medicare–will be calculated from the full $100,000. On the other hand, if you’re an S corporation and you pay yourself a salary, your [deductions] will be based [only] on your salary rather than your total net revenue.”

Depriving yourself of a salary can also add financial stress, which can hurt your business decisions. Paying yourself is not just about the money. It also helps prevent burnout and protect your mental health, and it can be a real motivator to reinvest in your business.

If paying yourself a salary puts too much stress on your business, this is a good opportunity to look for inefficiencies and free up some extra cash for you to take home.

Owner’s draw vs. salary: the two ways to pay yourself

An owner’s draw is money you take from business profits as needed. A salary is a fixed, regular paycheck you run through payroll. Your business structure usually decides which one you can use.

How your business structure affects how you pay yourself

Your business structure usually decides which method you can use.

• Sole proprietors and single-member LLCs: typically take an owner’s draw.
• Partnerships: partners usually take draws based on their share of the profits.
• S corporations and C corporations: owners who work in the business must pay themselves a reasonable salary through payroll.

If you are not sure which rules apply to you, it is worth checking with an accountant before you decide.

How much should you pay yourself?

How much should you pay yourself? Enough to cover your living expenses without draining your business’s cash flow. A common benchmark is a set percentage of your average monthly profit.

A good place to start is by asking what your labor is worth. In other words, what would you be paid at a similar company? Use these five tips to set your pay:

1. If your business is established and profitable, pay yourself a regular salary equal to a percentage of your average monthly profit.
2. Don’t set your monthly salary to an amount that may stress your company’s finances at any point.
3. Consider changing your tax treatment or organization type to an S corporation to reduce your self-employment tax liability.
4. Take other profit distributions regularly, but only when those distributions won’t be a burden for the business.
5. Periodically review your salary as part of your overall compensation and adjust it up or down based on the business’s revenue and cash needs.

If you have an accountant and want an outside opinion, you can run your final number by them to find out if they think this sum is appropriate or if it misses the mark.

How to start paying yourself

Setting up your own pay takes three steps.

1. Separate your business and personal finances so your records stay clean.
2. Choose an owner’s draw or a salary based on your business structure.
3. Set a regular schedule so your pay stays predictable.

Once your pay is set up, keeping it consistent is what makes it stick.

Ready to pay yourself with confidence

You now have what you need to set your own pay with confidence and give yourself a well-earned paycheck. Once your salary is set, Melio helps you manage bill pay and cash flow so paying yourself stays simple every month.

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