Here’s how to calculate a business owner’s salary
One of the biggest questions small business owners face is how – and how much – to pay themselves. While it might not be the first thing on your mind when launching a business, getting it right early on helps set you up for long-term success.
The way you pay yourself depends on your business structure, stage of growth, and financial needs. Let’s break it down.
Salary vs. owner’s draw: What’s the difference?
There are two common ways business owners pay themselves:
Salary
With a salary, you receive a set paycheck, just like an employee, with taxes withheld upfront. This payment method is required for S-corporations, C-corporations, and LLCs taxed as corporations. The IRS also mandates that your salary be reasonable, meaning it should align with what someone in your industry would typically earn for the same role.
Owner’s draw
With an owner’s draw, you withdraw money from your business profits as needed. This method is typically used by sole proprietors, partnerships, and LLCs that aren’t taxed as corporations. Unlike a salary, no taxes are deducted upfront, so it’s important to set aside money regularly for tax payments.
Which one is right for you?
Your business structure determines whether you can take a salary or an owner’s draw:
Other factors to consider:
- Business stage: Many entrepreneurs don’t pay themselves in the early days. Once your business has stable cash flow, start including your pay in operating expenses.
- Personal finances: Your pay should cover living expenses like rent, mortgage, and car payments. If you’re looking for a small-business loan, lenders often want to see consistent personal income.
How much should you pay yourself?
The average small business owner makes around $68,000 per year, according to Payscale data. But your salary or draw should be based on your business’s profitability, industry, and financial goals.
A common approach is paying yourself a fixed percentage of net profits – after covering business expenses and payroll if you have employees. This method keeps your pay in line with business performance.
Common mistakes to avoid
Mixing personal and business finances
Always keep separate accounts! Using your business funds for personal expenses can cause tax headaches and hurt your changes of securing loans.
Not budgeting for taxes
If you're taking an owner's draw, set aside money for taxes with every withdrawal. Business owners typically owe quarterly estimated taxes, so plan ahead to avoid a big bill.
Never pay yourself
It's normal to reinvest earnings early on, but long term, your compensation should be part of your business plan. Include your pay in financial projects so you know what's needed for growth.
Bottom line
Your payment method – salary or owner’s draw – depends on your business structure and financial situation. No matter which you choose, consistency and smart planning will help you build a sustainable income while keeping your business financially healthy.
Ready to take control of your business finances? Explore our business accounts and resources to help you plan, manage, and grow your business successfully. Learn more today!