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Are you paying yourself correctly as a business owner? Learn how to set the right salary or draw, manage taxes, and balance personal income with business growth to secure your financial future.
As a business owner, one of the trickiest and most overlooked financial questions you can face is this: “Am I paying myself correctly?” While it may sound like a simple decision—just cut yourself a check—it’s far more nuanced than that. Striking the right balance between reinvesting in your business and compensating yourself fairly can influence not only your personal financial health but also your business’s long-term success.
In this blog, we’ll break down what it really means to pay yourself correctly, how to determine the right compensation, common mistakes to avoid, and tax-efficient strategies you can use to get the most out of your income.
Many entrepreneurs fall into one of two camps:
Neither is ideal.
Paying yourself correctly isn’t just about putting money in your pocket—it’s about creating financial sustainability for both you and your business. The right compensation approach can:
How you pay yourself depends heavily on how your business is structured. Here's a breakdown by business entity:
Source: Sole proprietorships | Single member limited liability companies
Source: Partnership
Source: S Corporation
Source: C Corp
👉 Learn more about business structures from the IRS
If you’re an S Corp owner (or even a C Corp owner-employee), the IRS requires that you pay yourself a reasonable salary—but what does that mean?
A reasonable salary is “an amount that would ordinarily be paid for services by enterprises under similar circumstances.”
You can use resources like the Bureau of Labor Statistics, salary.com, or Glassdoor to find industry benchmarks. If you’re audited, the IRS may look at these data points to determine if you’re compensating yourself appropriately.
There’s no one-size-fits-all answer, but here are some guiding questions to help you evaluate your current compensation:
If your compensation doesn’t cover your living expenses, it may lead to personal debt or financial stress—which will eventually affect your business performance.
Treating your pay as a regular, predictable expense helps with both personal and business budgeting. Whether it's weekly, biweekly, or monthly—consistency matters.
When your business has a strong cash flow, you may increase your pay or take additional distributions. But in leaner months, having a baseline salary or modest draw helps ensure the business survives.
Mixing personal and business finances is one of the biggest mistakes business owners make. It makes accounting harder, taxes more complicated, and can raise red flags in audits.
This not only helps with transparency, but also protects your legal liability—especially important if you operate under an LLC or corporation.
Your compensation method affects your tax obligations. Here’s what to know:
A tax professional can help you decide which structure and salary strategy is best for your situation.
Here are some pitfalls to steer clear of when paying yourself:
While it’s admirable to reinvest in your business, underpaying yourself can:
Taking large draws or salaries without regard for the business’s health can:
When pay is sporadic or undocumented, it creates issues at tax time and may confuse financial reporting.
If you’re not withholding taxes from your paycheck (or setting money aside for quarterly estimates), you may face unexpected bills and penalties.
Your compensation should evolve as your business grows. Don’t treat your initial pay structure as permanent. Instead, set regular intervals to review and adjust.
Use tools like cash flow forecasts and profit & loss statements to guide these decisions. And consider creating a compensation policy for yourself, even if you’re the only employee. This builds discipline and helps you treat your business like a business—not a hobby.
An accountant or bookkeeper can:
If you’re ready to scale or switch business entities, a CPA or tax strategist can walk you through the pros and cons based on your goals.
Getting paid is great—but so is long-term security. Think beyond monthly income by planning for:
Paying yourself correctly means not just today’s paycheck—but also tomorrow’s peace of mind.
Depending on your business structure and goals, there are several ways to pay yourself:
When paying yourself correctly, it’s important to think strategically about how your compensation supports both you and your business’s growth:
Small business income can be unpredictable, especially if you’re freelancing or in a seasonal industry. Here’s how to maintain steady pay:
While you technically can, it’s best to document all payments through checks or direct deposits. This helps maintain clear records and simplifies tax reporting.
Many startups don’t pay owners much (or at all) early on. If you need personal income, consider a modest draw and factor that into your business cash flow planning. Sometimes, additional personal savings or outside income may be necessary until the business stabilizes.
Yes, increasing your pay when the business profits grow is reasonable. Just keep a balance between your personal compensation and funds needed to sustain growth.
Sarah runs her business as a sole proprietor. Each month, she calculates her net profits, sets aside taxes, and takes an owner’s draw equal to her living expenses plus some buffer. She keeps a personal budget aligned with this draw and saves extra profits in a business account for future investments.
John pays himself a reasonable salary based on market rates for a CEO in his region. He runs payroll through a service to withhold taxes properly. At year-end, John distributes the remaining profits as dividends, saving on self-employment tax.
Maria takes a salary and receives dividends from her corporation. Because her salary is a deductible business expense, she reduces corporate tax liability. She works with her CPA to find the optimal balance between salary and dividends to minimize her overall tax bill.
These tools automate payroll taxes, direct deposits, and filings, reducing errors and saving time.
Accounting software helps track business income and expenses, making it easier to calculate owner draws or salary.
Investing in professional guidance can prevent costly mistakes and optimize your pay strategy.
Paying yourself correctly is fundamental for business sustainability and personal financial health. It requires understanding your legal structure, following tax rules, balancing personal needs with business growth, and staying disciplined with financial management.
Don’t let confusion or procrastination keep you from compensating yourself fairly. The right strategy not only rewards your hard work but also paves the way for lasting business success and peace of mind.
Being audited is comparable to being struck by lightning. You don't want to practice pole vaulting in a thunderstorm just because it's unlikely. Making sure your books are accurate and your taxes are filed on time is one of the best ways to keep your head down during tax season. Check out Vincere's take on tax season!
This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.
For business tax planning articles, our tax resources provides valuable insights into how you can reduce your tax liability now, and in the future.
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