How Much Should You Pay Yourself

The simplest way to draw money from the business is to pay yourself a salary. But it’s not the only method. You can also take money out through business owner draws or dividends, which is where you take a portion of the company’s profits.

Pros of paying yourself a salary

• You get a stable and recurring business expense to factor into your accounts  
• It also means you get a stable, predictable income each month 

Cons of paying yourself a salary 

• If your business has a bad month, paying yourself the same salary could disrupt cash flow. You could alter it slightly, but it still needs to fall into what the IRS considers 'reasonable compensation' 

Pros of paying yourself through owner draws

• Owner draws are much more flexible and can fluctuate according to how the business performs 

Cons of paying yourself with owner draws

• Owner draws are by nature inconsistent and it's hard to predict what they'll be each month 
• Owner draws reduce business equity, which can impact future business spending

Business debt

Another thing you will need to look at is the amount of business debt you have, if any. If you need to meet regular monthly repayments on business credit cards or loans, this will impact how much you can take out for yourself. 

Your time

While it may not be as tangible as some of the other things to consider, your time is an important factor as well. Business owners tend to put long hours into their business, especially in the early days when you’re just getting it off the ground.  

If this sounds familiar, then you should definitely be compensated for that. You wouldn’t expect an employee to put in lots of hours per day and receive a minimal salary, so why should you? Ask yourself, does your pay seem reasonable compared to the amount of time you spend working? Try to answer honestly and work that into your calculation.

Retirement savings

When you’re a business owner, saving for retirement can be a bit more complicated. It’s down to you to set up and pay money into a retirement plan each month.

So, you need to ensure that you have enough money in your salary and monthly budget to contribute what you want to retirement savings. One way to look at it is to sit down and draw up a target amount you want to set aside each month.

If you’ve just started your business, this might be a smaller amount for now. But note your target for the future once business picks up. Now, see whether you can fit that amount into your budget with the salary you’re paying yourself or thinking of paying yourself.

If you can’t, then you might have to revisit your salary.

Health care

Health care plans are another thing you need to set up yourself as there’s no employer to do it for you. There are health care plans that you can purchase as a self-employed person or business owner.

If you have employees you need to set up health care for, you could use a similar plan for yourself. But you need to make sure that you can cover the costs from your own salary. This is not something you want to overlook or skimp on!

Tax

A business owner will need to set aside between 30-40% of their income to cover federal and state taxes. These payments must be made quarterly, so it’s important to set aside funds for them regularly.  As you will be making these savings from your salary, it’s important that it can cover those savings and still have enough left over for everything else.

As you will be making these savings from your salary, it’s important that it can cover those savings and still have enough left over for everything else.

Living Expenses

Only you know how much you need to cover your day-to-day costs. This is where it’s a good idea to draw up a list of all your expenses, including fixed and variable expenses.  

Fixed expenses might include your rent or mortgage, subscriptions, cable, insurance or debt repayments. Variable expenses could include groceries, eating out or fun purchases.  

Be realistic with how much you need each month to cover these things. Then, add that to things like health insurance and retirement planning to get a better idea of how much you need. 

Later you can think about how much you want, but covering the basics is your first step.

Lastly, one of the most important things to consider when deciding on your business owner salary is your worth.  

Some business owners are hesitant to take too much money out of the company out of fear it’ll impact cash flow too much. But at the end of the day, if you’re building this company from the ground up, putting in valuable time and effort, you should be compensated. It’s important to know your worth as a business owner and decide on a salary that reflects that. 

However, it can be a difficult thing to decide on. For solid business planning ideas and treasury management support, get in touch with the National Bank of Arizona today. We can help take a load off your mind while you’re busy building your business and trying to keep it profitable.  

To help you work out how much salary to set aside, how to calculate cash flow, profit margins and much more, take a look at our business calculators.

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