How Much Should You Pay Yourself? A Step-by-Step Guide for Business Owners

When you are running your own business, deciding how much to pay yourself can be a difficult task. Unlike a salaried position, where compensation is clear, business owners need to balance personal income with maintaining business cash flow. For some business owners, this task is so daunting that they often fail to pay themselves or they don’t pay themselves enough. So, how do you determine the right amount to pay yourself? This guide will walk you through a practical, step-by-step process to ensure you make a sound, sustainable decision.

Assess Your Business Structure

Your business’s legal structure plays a crucial role in how you can pay yourself. Each structure has its own rules for owner compensation and each country may have different regulations governing each structure. So be sure to research the rules in your own country. For example, in some countries a sole proprietor can take an owner’s draw from the profits, while the founder of a corporation is treated as an employee and must pay themselves a reasonable salary. 

Calculate Your Business Profits

When it comes to paying yourself as a business owner, it is crucial to draw from your business’ profits, not its revenue. Start by determining your total revenue, then subtract all expenses—this includes operating costs, taxes, and funds for future investments. What remains is your profit, and that’s where your salary should come from. It's also essential to retain some profit in the business to cover growth opportunities, unexpected costs, or slower periods. A general rule of thumb is to reinvest 30% to 50% of profits back into the company, but the exact amount will depend on your specific situation.

Determine Your Personal Needs

Your compensation should be based on your personal financial needs. Begin by calculating your monthly expenses, including housing, food, transportation, healthcare, and any personal debt. This will give you a clear idea of the minimum income required to meet your basic costs. However, be mindful of setting your pay too low, as underpaying yourself over time can cause financial stress and burnout, ultimately affecting your well-being and the success of your business.

Consider Industry Standards

Research what others in your industry or similar roles pay themselves. This provides you with a benchmark. Industry norms can vary significantly, and knowing what others in your field pay themselves helps you stay competitive and ensures you’re not undervaluing your work. You can gather this information from industry associations, online surveys, or networking with other entrepreneurs in your space.

Plan for Taxes

Finally, don't forget to account for taxes when determining your salary. As a business owner, you may be responsible for both income tax and self-employment tax. Consult with a tax professional to understand your obligations, and factor in those tax liabilities when calculating your pay.

A Checklist

Your business will change and grow over time, and your salary should reflect that. Make it a point to review your compensation at least once a year. If your profits are up, reward yourself with a pay increase. But during tougher times, you may need to lower your salary for a while to help keep things running smoothly. By regularly adjusting your pay, you stay in tune with your business’ financial health and ensure both you and your company thrive. Here are some key questions to ask yourself when determining if you’re ready to start paying yourself a salary as a business owner:

1. Is my business consistently profitable with a stable customer base?

2. Do I have enough cash flow to cover both business expenses and a salary?

3. Do I have a cash reserve for emergencies?

4. Am I reinvesting enough in the business?

5. What are my personal financial needs?

6. Am I meeting my tax obligations?

7. How much would someone else in my role expect to be paid?

8. Can I pay myself while still maintaining future business growth?

   
   

Answering these questions will help you assess whether your business is financially stable enough to start paying yourself a salary. Have questions around paying yourself as an entrepreneur? Why not join the conversation in the Konseye community or join one of our group mentoring sessions with qualified mentors dedicated to supporting your growth. 

Remember, with the right network anything is possible!

Adejoké Babington-Ashaye

Team Konseye