How to pay yourself as a business owner

If you own — or are planning to own — your own business, you may be wondering how exactly you get paid, as well as how much you should pay yourself. After all, it’s not just a case of dipping into your profits as and when you need to; the method you choose and the amount you take can directly affect your business’s growth, cash flow, and even tax obligations.

As a result, it’s important to understand the nuances of your income as an entrepreneur. In this guide, we’ll break down everything you need to know about paying yourself, from determining your entrepreneur’s salary to understanding the typical income of a business owner.

So let’s dive straight in.

Determining your entrepreneur salary

Deciding how much to pay yourself is one of the trickiest parts of being a business owner. Here are a few steps to help you make an informed decision:

1. Understand your business finances. Closely monitor your actual or expected revenue, expenses, and profits, as you’ll need a clear picture of what you can take out of your business without jeopardizing operations.

2. Factor in your personal expenses. Once you have a ballpark figure, calculate your monthly personal expenses and set a realistic goal for how much you need to live comfortably. This helps ensure that you’re neither overpaying nor underpaying yourself.

3. Benchmark industry standards. If possible, research how much other small business owners in your industry make. While these estimates may vary widely — and are subject to multiple factors — getting an idea of the average can provide a helpful comparison baseline.

How much do small business owners make?

As mentioned, the income of a small business owner depends on several factors, including their industry, location, and business size. Reliable, up-to-date, industry-specific figures are hard to come by, although studies by Zip Recruiter suggest that:

• The highest average incomes for small business owners are earned in New York, although seven of the top 10 earning locations (by city) are in California.

• Retail store owners average a salary of around $50,000.

• Professionals such as lawyers, estate agents, and management consultants average anywhere between $36,000 and $144,000.

As a result, it’s recommended to conduct research that is tailored to your location and industry, as well as the size and seniority of your business. If you’re just starting out, for instance, it’s highly unlikely that your initial earnings will be comparable to an established competitor.

It’s also important to keep in mind that many small business owners opt to reinvest a significant portion of their profits back into their business, which can impact their take-home pay. 

How to pay yourself as a small business owner

Once you have an idea of how much you’re going to pay yourself, you need to know how the process works.

There are two common ways to pay yourself as a small business owner, and the most suitable choice depends on your business structure.

1. Owner’s draw

As the name suggests, an owner’s draw allows you to take money directly from your business profits. This approach is common for sole proprietors, partnerships, and limited liability companies (LLCs).

An owner’s draw may be suitable if:

• You have an informal business structure like a sole proprietorship or single-member LLC.

• Your income fluctuates from month to month.

• You want flexibility in how and when you pay yourself.

To conduct an owner’s draw, you withdraw money from your business’s profits, typically by transferring funds from your business account to your personal account. Ensure that you track these withdrawals carefully to ensure they don’t exceed your business’s available profits.

Advantages

• Flexibility. You can adjust the amount you take based on your business’s cash flow.

• Simplicity. There’s no need to set up a formal payroll system.

Disadvantages

• Unpredictable income. Irregular payments can make it challenging to plan personal expenses.

• Potential cash flow issues. Frequent or large withdrawals can leave your business underfunded.

Tax and Compliance —

4 min

How are owner's draws taxed? A guide for small business owners

If you take money out of your business for personal use, here’s what you need to know about the tax consequences.

2. Salary

Taking a salary means paying yourself a fixed amount at regular intervals, much like an employee. This approach is often used in businesses that are structured as S Corps.

It may be suitable if:

• Your business operates as a corporation (e.g., an S Corp or C Corp).

• You want consistent income for personal budgeting.

• You are legally required to pay yourself a “reasonable salary” under Internal Revenue Service (IRS) rules for corporations.

To pay yourself a salary, you will need to set up a payroll system and pay yourself a regular paycheck. You will also need to deduct all relevant payroll taxes, including federal income tax, FICA taxes, and any local or state-level income taxes.

If you choose (or are required) to pay yourself a salary, it’s a good idea to use an automated payroll tool like Remote. This ensures that you are fully compliant with all relevant state and federal payroll tax and employment laws, and makes it quick and painless to run your payroll each month. Learn more.

Advantages

• Stability. Consistent income simplifies personal financial planning.

• Professionalism. A formal payroll system creates a clear distinction between business and personal finances.

Disadvantages

• Reduced flexibility. Your income remains fixed, even if your business experiences seasonal fluctuations.

• Administrative overhead. Setting up payroll requires additional time, effort, and potentially costs.

Common mistakes to avoid

When paying yourself, it’s easy to make mistakes that can lead to financial strain or legal issues. Avoiding these common pitfalls can help you maintain financial stability and keep your business running smoothly:

Taking too much, too soon

Overdrawing from your business profits, especially during the early stages of your business, can leave your company underfunded and struggling to cover expenses.

Start with a modest payment and increase it gradually as your business stabilizes and grows. You should also aim to keep a buffer of at least three to six months of operating expenses in your business account to weather unexpected costs or downturns.

Not paying yourself at all

Some business owners — especially in the tech sector — opt to reinvest all their profits back into the business. But while neglecting to pay yourself may seem noble, it can lead to personal financial instability and burnout.

Ensure that you treat yourself as an employee and allocate a portion of the profits for your personal income. Set a minimum threshold for paying yourself (even if it’s a small amount initially), and always remember that your personal financial health directly impacts your ability to sustain your business in the long run.

Making inconsistent payments

This can sometimes be difficult to avoid, especially early on, but paying yourself irregularly or inconsistently can make it hard to budget for personal expenses. It can also make it difficult to accurately track your business’s financial performance.

Try to establish a regular payment schedule, whether it’s weekly, biweekly, or monthly. If you use an owner’s draw, set a cap or percentage to ensure withdrawals align with your business’s cash flow, while, for salaries, automate your payroll with a tool like Remote to maintain consistency.

Blurring personal and business finances

It may be tempting, but using your business account to pay for personal expenses (or vice versa) can lead to messy bookkeeping, tax issues, and a lack of clarity about your business’s financial health.

If you haven’t already, make sure you open separate bank accounts for your personal and business finances, and reimburse yourself for legitimate business expenses instead of using the business account directly.

Balancing business needs with personal income

As touched upon in that last point, it’s crucial to balance personal needs with the financial health of your business. As a result, it’s advisable to:

1. Reinvest wisely. Allocate a portion of your profits to growth activities, such as marketing, equipment, and hiring. This can increase your long-term earning potential.

2. Plan for taxes. Set aside a portion of your income for tax obligations to avoid surprises.

3. Monitor cash flow. Always ensure your business has enough liquidity to cover operational expenses.

As your business grows, it’s also a good idea to periodically review its financial performance and adjust your payments accordingly. Increase your salary or draw when your business achieves consistent profitability, and consider working with a financial advisor to align your payment strategy with your long-term goals.

How can Remote help?

Deciding how to pay yourself as a business owner is both an art and a science. But by balancing your personal salary with your business’s financial health, you can ensure stability for both your personal and professional life.

Having the right tools at your disposal is key to that. If you opt to pay yourself a salary, our payroll platform makes it quick and easy to ensure that you — and your people — are paid accurately and in full compliance with all relevant laws. There’s no headaches and no need to hire internally — we handle everything, wherever you and your team are based.

To learn more, speak to one of our friendly experts today.

Trust G2’s multi-country payroll leader to keep you compliant

Hire and pay your global team with Remote and get access to our team of global taxation experts.

Get started nowSchedule a demo