How Much Should I Pay Myself as a Business Owner?

When you work for someone else, your paycheck is usually straightforward. However, when you own the business, deciding how much to pay yourself can be a tad more complicated.

After all, money coming into your business has plenty of other places to go. You may need to cover operational expenses, inventory, rent, and more before you even consider how much you should be taking home. This leaves many business owners wondering exactly how much they should be paying themselves.

The short answer? There is no single percentage or dollar amount that every business owner should pay themselves. Instead, the goal is to find an amount that works for your personal finances while still leaving the business the funds it needs to operate.

“You should absolutely pay yourself for the work you’re doing,” says Juan Rosales, Community Banker. “But you also have to look at the business and ask, ‘Okay, if I take this much out, what does that leave me with?’ You don’t want to pay yourself so much that the business is struggling to cover what comes next.”

Here is a practical way to find that balance.

Step 1: Figure Out What Your Business Can Afford to Pay You

What you would like to be paid and what actually works are often two different things. Instead of starting with a pie-in-the-sky number, start by looking at what your business can realistically support.

Look at Cash Flow, Not Just Revenue

Revenue tells you how much your business earns, but it does not necessarily tell you how much money is available to spend at any given time.

For example, your business could have a strong month of sales processed, but with invoices not yet paid. Or you may know that a sizable annual insurance payment is coming due next month. Looking only at revenue can make the business appear to have more available cash than it really does.

Instead, look at your cash flow: the money actually moving into and out of the business. If your cash flow changes throughout the year, it can also help to look at several months at once. A business that does particularly well during the holidays, for instance, may need to save some of that cash to support slower months later.

“Seeing money in the account can make you feel like you have room to spend it, but that number doesn’t tell the whole story. You still have to think about what’s coming due next week or next month, and whether the cash coming in will cover it,” says Rosales.

Make Sure Your Operating Expenses Are Covered First

Next, make sure your business can comfortably cover its regular expenses.

Depending on your company, those may include:

• Employee payroll and benefits
• Rent or commercial mortgage payments
• Inventory, supplies, or materials
• Utilities
• Insurance
• Loan and credit payments
• Software and subscriptions
• Marketing expenses
• Vendor or contractor payments

Some expenses will be relatively predictable, while others may fluctuate from month to month.

Step 2: Think About Taxes and Your Business Structure

Not every dollar left after paying your operating expenses is necessarily available to take home.

Set Aside Money for Taxes

Business owners may need to reserve money for federal, state, or local taxes. Depending on your business structure and individual tax situation, you may be responsible for making estimated tax payments throughout the year.

That makes tax planning an important part of determining how much you can afford to pay yourself.

Rather than waiting until tax season to figure out what you owe, consider working with a CPA or tax professional to estimate your tax obligations and create a system for setting money aside throughout the year.

Consider Your Business Structure

There are really two separate questions to answer: How much can you afford to pay yourself, and how should that money actually be paid?

The second question depends partly on how your business is structured.

For example, sole proprietors commonly take money from the business through an owner’s draw. Partnerships and multi-member LLCs may have compensation or distribution arrangements outlined in their operating agreements. Corporations can have completely different payroll and compensation requirements.

If your company is structured as an S corp, there may also be specific rules surrounding compensation for owners who work in the business.

The good news is that you do not need to become an expert on all of those rules yourself. This is, again, where a CPA or tax professional can come in handy and help you understand the appropriate way to compensate yourself based on your company’s legal and tax structure.

Step 3: Decide How Much Cash the Business Needs to Keep

Once your regular expenses and taxes are accounted for, it can be tempting to take everything that remains. You want to leave funds for two big things: unexpected expenses and growth.

Leave a Cushion for the Unexpected

Every business eventually runs into expenses that were not part of the original plan.

Equipment can break. Customers can pay late. Sales can slow down. Insurance premiums or supply costs can increase.

Keeping a business emergency fund can make those situations easier to manage without immediately turning to debt or cutting other expenses. 

“The more unpredictable your cash flow or expenses are, the more valuable that cushion becomes,” Rosales says. “Having cash available gives you time to respond instead of having to make a rushed financial decision.”

Don’t Pay Yourself with Money You’ll Need for Growth

Not every dollar left inside the business has to be reserved for emergencies, either. You may eventually want to hire an employee, purchase equipment, increase inventory, launch a marketing campaign, or expand into a larger space.

Those goals require cash.

Before increasing your own compensation, think about what you want the business to accomplish over the next six months, year, or several years. Paying yourself more today may mean having less available for an investment that could help the business grow later.

The Right Amount Is the One Your Business Can Keep Supporting

Once you’ve looked at these three big buckets, it’s time to put it together. Start with your business’s cash flow, consider money that will go towards taxes, and leave room for growth and the unexpected. The remaining figure will be a rough start to what your business can comfortably pay you.

Instead of searching for one perfect number, focus on finding an amount you can sustain without leaving the business short on cash. And as your business evolves, keep revisiting that number. A community banker, accountant, or other financial professional can also help you look at the bigger picture and determine how your compensation fits alongside your company’s other financial priorities.