How to pay yourself as a business owner
Small Business Guides
7 min read
Learn how different types of business owners pay themselves. And get some tips on how much.
How to pay yourself as a sole trader or as a company
Your business structure affects how you take pay and how you’re taxed on that pay. If you’ve never done anything to set up a specific business structure, then you’re automatically considered a sole trader.
How to pay yourself as a sole trader or partnership
Sole traders and partnerships pay themselves simply by withdrawing cash from the business. Those personal withdrawals are counted as profit and are taxed at the end of the year. Set aside a percentage of your earnings in a separate bank account throughout the year so you have money to pay the tax bill when it’s due.
How to pay yourself as a company
Company owners often pay themselves a salary, which works the same way as with a normal job. The salary shows as an expense on the business books and the owner pays personal income tax on it. It’s common for owners of smaller companies to take a modest salary and top it up with dividends from profits.
Get tax advice
While a salary might sound nice, there’s extra admin and extra costs to being a company. The numbers don’t always stack up, so definitely speak to an accountant or tax professional to decide what’s right for you.
How much to pay yourself
Once you’ve decided how to pay yourself as a business owner, you still need to decide what to pay yourself. That number needs to strike a balance between what your household requires and what your business needs.
What the business needs
You need to leave enough cash in the business to cover:
Expenses: Keep a formal list of what you owe and when it’s due so you don’t draw too much from the business at the wrong time. Accountants say it doesn’t go well when business owners try to guesstimate their cash flow requirements. Keep some money aside for taxes too.
Rainy day funds: Tuck away some cash to ride out business disruptions. You might keep enough aside to cover 30, 45 or 90 days worth of expenses, for example.
Reinvestment: Hold onto some money for developments and improvements. Someday you’ll want to buy new work tools, try a new marketing idea, or hire a consultant.
What the household needs
Your household budget needs to cover day-to-day living expenses and debt repayments such as mortgages. Don’t forget to make a plan for insurance and retirement, which your employer may have managed before you went out on your own.
Finding a balance
There will be negotiable items in both the home and business budgets. Be prepared for some give and take – especially during the early days of your business.
Pay yourself regularly
Don't just dip into your business funds as and when you need to. Set up payments for you and your employees (it may be weekly or monthly) in your accounting software, and stick to them.
Build that into your business plan right from the start, perhaps with a rising salary as your business grows. That way you'll get used to the amount of money you receive and won't have to worry about taking out occasional large lump sums.
This will also look better to your employees. Regular small payments will be more acceptable to them than random large lump-sum withdrawals from the business. They will also look more acceptable to the government, too. If you take out big sums of money at irregular times, it may raise eyebrows at the tax office or lead to an tax investigation of your company.
How to pay yourself fairly as a business owner
Irrespective of how much you pay yourself, be fair about it. Pay yourself a consistent amount at frequent intervals. That predictability will help you run a functional home budget.
This is where the rainy day fund for your business can help. Having a reserve of cash in the business reduces the need to dip into your own pocket when there’s an unexpected expense at the shop or office. And having that financial security in your personal life helps clear your head to be a better business manager.
An accountant or bookkeeper can help you figure out how to pay yourself as a business owner. They’ll help you work out an amount for now and a plan for the future.
Consider the legal structure of your business
How much you can pay yourself, and when, might be restricted by the legal structure of the business you run.
For example, if you’re a sole trader you’re usually free to pay yourself whatever and whenever you like. That's partly because you’re not accountable to shareholders or stockholders.
But other types of business, like incorporated businesses, usually have the business owner on the payroll. They would receive wages on a regular basis, just like any other employee.
However, the rules do vary from country to country, so check with your accountant before you decide anything. Be sure to record all transactions in your accounting software so you have an tax investigation trail too. Do this just in case the tax office decides to investigate your payments to yourself.