How Much Should A Small Business Owner Pay Himself?

As a small business owner, determining how much you should pay yourself is a tricky balancing act. The small business owner salary isn’t just about covering your personal bills—it’s about setting a salary that allows you to live comfortably while keeping your business healthy and ready for growth.

There are many factors to consider: business structure, profitability, personal financial needs, and tax implications. It can feel like walking a tightrope, but with the right strategies in place, it’s possible to set a compensation plan that supports both you and your business.

In my own experience, paying myself too little in the early days of my business almost led to burnout. I was worried about the business’s cash flow, but I also needed enough to cover my living expenses. It took some trial and error, but learning how to pay myself responsibly and strategically made a huge difference in my ability to grow the business sustainably.

Now, let’s dive into the foundational principles of paying yourself as a small business owner.

Foundational Principles: Can You Afford To Pay Yourself?

Before you can determine how much to pay yourself, the first and most important question is, can your business afford it? A misstep in managing your pay can lead to cash flow issues, which is a major reason why many small businesses fail in their early stages. Here’s where it all starts: ensuring the financial health of your business.

Separate Business And Personal Finances

I can’t stress this enough—keeping business and personal finances separate is a non-negotiable. Whether you’re a sole proprietor, running a partnership, or have set up an LLC, it’s crucial to have separate bank accounts. It’s not just a good habit; for LLCs and corporations, it’s a legal requirement. For sole proprietors, it simplifies everything from tracking business expenses to filing taxes.

When I first started my business, I didn’t separate my accounts right away. It seemed like a hassle and unnecessary at the time. But when tax season came around, it was chaos. Mixing personal expenses with business funds made it hard to claim deductions, and I ended up missing out on potential tax savings. I learned the hard way, but now I always advise new business owners to set this up from day one. A dedicated business account lets you track profits, expenses, and pay yourself in a transparent, tax-friendly manner.

Prioritise Business Health And Cash Flow

Now that you’ve got separate accounts, you need to assess whether the business is truly in a position to pay you. This isn’t just about looking at your bank balance. Cash flow is key. Prioritising your business expenses first is crucial, and that means covering rent, employee wages, supplies, and any loans or debts. Only once those obligations are met should you consider paying yourself.

In my early days, I often paid myself first and then scrambled to cover other expenses. The result? Stressful months where I had to take out loans or delay payments to suppliers. Since then, I’ve used a budgeting method that ensures I prioritise business needs and pay myself a reasonable amount once everything else is covered.

One strategy I recommend is to keep a business emergency fund. Ideally, this should cover three to six months’ worth of total business expenses, including your wages. This reserve acts as a safety net, so when business takes a dip (and it will), you’re not left scrambling to cover your living costs.

Assess Your Personal Financial Needs

While it’s essential to consider the business’s health, you also need to understand your own financial needs. To determine a realistic salary, track your personal spending. Break it down into fixed costs (mortgage, utilities), variable costs (groceries, travel), and discretionary spending (entertainment, hobbies). This gives you a clear “run rate,” or the minimum income you need to live comfortably.

A good rule of thumb is to have 12 to 18 months of living expenses saved up in a personal emergency fund before diving into a business full-time. That way, when things get tough, you’re not relying on the business for immediate survival.

In the early stages of my business, I didn’t track my personal expenses properly, which led to unnecessary stress when I wasn’t pulling in consistent revenue. Once I created a budget that reflected both my personal and business expenses, it became much easier to decide how much to pay myself—and more importantly, when.

How To Pay Yourself: Salary Vs. Owner’s Draw

Choosing how to pay yourself as a small business owner comes down to your business structure and tax implications. There are two primary ways you can pay yourself: Owner’s Draw and Salary. Both methods have their pros and cons, and understanding them can help you avoid pitfalls down the line.

Owner’s Draw: What You Need To Know

An Owner’s Draw is a distribution of the company’s profits to the owner, typically used for businesses like sole proprietorships, partnerships, and LLCs that are taxed under their default status. Unlike a salary, the draw doesn’t involve payroll taxes being withheld by the business, meaning you are responsible for paying your own income tax and self-employment tax.

Key Points:

• No Payroll Taxes: As an owner, you are not required to withhold income tax or payroll taxes (Social Security or Medicare) from your draw.
• Business Structure: This method is used for Sole Proprietorships, Partnerships, and LLCs taxed as sole proprietors or partnerships.
• Tax Responsibility: You must pay income taxes and self-employment taxes on the business profits you draw. This is done through quarterly estimated tax payments.

Example:

If your business has had a profitable quarter, you might decide to take a draw of $5,000 for personal expenses. However, that $5,000 will be treated as part of the business’s profits and taxed at your individual income tax rate. In addition, you’ll need to account for self-employment taxes (about 15.3% for most people).

While an owner’s draw is simpler in that you don’t have to worry about withholding taxes each time, it means you must be proactive about setting aside money for taxes. Failing to make quarterly tax payments could lead to hefty penalties, so it’s essential to keep track of your earnings and plan ahead.

Salary: When Is It Appropriate For Owners?

A Salary is a regular, fixed payment to the business owner, similar to paying any other employee. It’s a more formal method of compensating yourself, especially if your business is structured as a C-Corp or an S-Corp. The business must withhold income taxes, Social Security, and Medicare taxes from your salary, just like with any other employee.

Key Points:

• Payroll Taxes: As an employee of your business, you are required to have payroll taxes withheld, including Social Security, Medicare, and income tax.
• Business Structure: This method is used for S Corporations and C Corporations, or LLCs that elect to be taxed as such.
• Tax Deduction: The business can deduct your salary as a business expense, which reduces its taxable income.

Example:

If your business is an S-Corp, the ATO requires that you pay yourself a “reasonable” salary based on the work you do in the business. Let’s say your business brings in $100,000 per year, and you decide that a reasonable salary for your role is $50,000. Your business would pay you $50,000 in salary, and you’d pay payroll taxes (about 7.65% for your share of Social Security and Medicare). The remaining $50,000 can be distributed as an owner’s draw, which would not be subject to payroll taxes.

The benefit of taking a salary in an S-Corp or C-Corp is the ability to reduce your business’s taxable income by paying yourself a salary, which lowers your overall tax liability. The downside is that salaries are subject to payroll taxes, which can add up.

Salary Vs. Owner’s Draw Comparison

Feature	Owner’s Draw	Salary
Business Structures	Sole Proprietorship, Partnership, LLC	S-Corp, C-Corp, LLC (elected S or C tax status)
Tax Withholding	None (you pay self-employment tax)	Payroll taxes (income, Social Security, Medicare)
Tax Responsibility	You pay quarterly estimated taxes	Taxes withheld by the business
Tax Deductible	Not deductible by the business	Deductible as a business expense
Draws Impact on Owner Equity	Reduces the owner’s equity in the company	Does not affect equity
Commonly Used For	Sole Proprietors, Partnerships, LLCs	S-Corps, C-Corps

S-Corp Strategy: Salary Vs. Distributions

If you’ve structured your business as an S-Corp, there’s a specific strategy that maximises tax savings. The ATO requires you to pay yourself a reasonable salary for the work you do. The good news is that once you’ve paid yourself that salary, any additional profits can be distributed as owner’s draw, which is not subject to payroll taxes. This is one of the primary reasons many small business owners choose the S-Corp structure—it can save you a significant amount on payroll taxes.

However, the ATO is particular about what constitutes a “reasonable” salary. Setting your salary too low to avoid payroll taxes can lead to scrutiny and potential penalties. The key here is ensuring the salary reflects the value of the work you’re actually doing in the business.

Real-World Example:

I had a client who ran a small web development firm structured as an S-Corp. He initially paid himself a minimal salary of $30,000 despite earning $150,000 in profits. This strategy was aimed at avoiding payroll taxes on the majority of his profits. However, when the ATO caught wind of it, they determined the salary was unreasonably low for the work he was doing and required him to pay back taxes, penalties, and interest. From then on, we made sure his salary was set based on industry standards for similar work, and the business continued to thrive without any tax issues.

How Much To Pay Yourself: Benchmarks And Strategies

Once you’ve established your business’s financial health and understand the methods for paying yourself, the next step is to determine a specific compensation amount. Setting this figure will require a blend of industry standards, business profitability, and personal financial needs. The strategies below provide a roadmap for determining how much you should pay yourself at different stages of your business.

For Startups: How To Pay Yourself As A Founder

When you’re just starting out, paying yourself a salary can be tricky—especially if funding is limited. Venture capitalists and investors often expect founders to take a reasonable salary to ensure they don’t get distracted by financial stress. However, in the early days of a startup, many founders choose to take minimal or even no salary, opting instead to reinvest profits into growing the business.

2025 Averages By Funding Stage:

• Seed-stage founders: Average salary of $147,000
• Series A founders: Average salary of $203,000
• Series B founders: Average salary of $214,000

However, when your business is in its earliest stages, you may not have this kind of funding to pay yourself. In this case, you might opt for a very minimal salary. For example, I’ve seen founders in early-stage businesses pay themselves just enough to cover their living expenses—often in the range of $30,000 to $50,000 per year—while putting the majority of business revenue back into the company to fuel growth.

If you’re not raising capital, a similar strategy applies: minimise your salary to preserve your business runway, or the amount of time your business can operate before needing additional funding. In my own case, I kept my salary low in the first year, opting to take out a draw only when absolutely necessary.

For Established Businesses: Profit-Based Compensation

As your business stabilises and grows, you’ll likely have more predictable cash flow. At this point, you can pay yourself a more consistent salary. One of the most common methods is to tie your salary to business profitability.

Profit-Based Rule Of Thumb:

Many small business owners choose to pay themselves around 50% of the profits. This ensures that a significant portion of the business’s earnings is reinvested into the company to drive growth, while you receive fair compensation for your work. The Small Business Administration (SBA) suggests aiming for a net profit margin of about 10% of revenue to be retained in the business. The remaining amount can be paid out as an owner’s salary or profit distribution.

The Holistic Method: A Step-By-Step Approach

This approach starts with determining your average monthly net income, and then subtracting necessary business expenses (including taxes, debt repayments, and savings). From there, you can determine how much is left to pay yourself.

Here’s a simple breakdown:

1. Start with Monthly Net Income: Calculate your average monthly net income after expenses.
2. Subtract Taxes: Set aside approximately 30% for taxes (this can vary based on your location and business structure).
3. Subtract Business Savings and Debt Repayments: Ensure you’re leaving room for growth, an emergency fund, and paying off business loans.
4. Remaining Amount for Salary: What’s left is the amount you can pay yourself. If this doesn’t meet your personal financial needs, you may need to adjust your draw or salary until the business is in a better cash flow position.

Example:

In my own business, when we reached profitability after the first two years, I used the Holistic Method to determine my pay. After setting aside funds for taxes, a cash reserve, and paying off initial business debt, I was left with a comfortable amount to pay myself—a significant step up from my early days of scraping by on minimal compensation.

The “Pay Yourself Last” Philosophy

This strategy is often used by entrepreneurs who want to reinvest most of their profits back into the business or create new income-generating assets, like real estate. The “Pay Yourself Last” philosophy prioritises business growth and wealth-building over personal income in the short term. Essentially, the business pays for its operating expenses and reinvestment needs first, and the owner is compensated from the remaining funds.

How It Works:

• Step 1: The business is run with the goal of investing in new assets—whether that’s expanding product lines, hiring staff, or acquiring property.
• Step 2: Once all of these essential goals are met and the business is generating a profit, the owner takes their compensation from the remaining profits.
• Step 3: The business is effectively building multiple revenue streams, not just from the company’s core operations but also from these assets. The goal is for the business to fund the acquisition of income-producing properties or investments, and then for the owner to benefit from these streams.

While this strategy is aggressive and not for everyone, it can significantly increase long-term wealth if done correctly. In my case, I used a similar strategy to acquire property that generated rental income. By paying myself last, I allowed my business to grow and build a financial safety net through assets.

Pay Yourself Last: Pros And Cons

Pros	Cons
Focuses on reinvestment, driving long-term growth	May not provide immediate personal income stability
Encourages wealth-building through assets	It can cause stress if personal finances are tight
Business growth takes priority over the owner’s pay	Requires solid cash flow management and discipline
Helps develop a diversified income stream	Not suitable for those who need a stable salary now

Determining a “Reasonable” Salary

Suppose you operate a business through a company structure in Australia, and you actively work in the business. In that case, it’s essential to ensure that the remuneration you pay yourself is consistent with both tax law and market practice.

While there is no direct equivalent to the U.S. “reasonable salary” rule for S-Corporations, the Australian Taxation Office (ATO) closely monitors how company directors and owners pay themselves, particularly in relation to:

• Division 7A (shareholder loans and drawings)
• Superannuation obligations
• Personal Services Income (PSI) rules
• Fringe Benefits Tax (FBT) compliance

Paying yourself an unreasonably low wage (while taking out funds as “loans” or “drawings”) may attract ATO scrutiny, as this can be considered an attempt to avoid income tax, superannuation, or other obligations.

What Is A “Reasonable” Salary?

A reasonable salary (or director’s wage) is generally:

The amount you would pay someone else to perform the same duties in your business, under similar circumstances.

When assessing whether your remuneration is reasonable, the ATO may consider:

• Duties and responsibilities: What role do you play? If you are the managing director and the primary worker, your salary should reflect the scope of your duties.
• Experience and qualifications: Someone with 20+ years of expertise in the field should be compensated more than an entry-level manager.
• Hours worked: A full-time director should generally draw a higher salary than one working part-time or on a casual basis.
• Comparable market salaries: What would you have to pay to employ someone else to do the same work? Tools like Fair Work Awards, industry associations, and websites such as Seek, Hays, or Glassdoor provide benchmarks.
• Consistency with staff pay: If you employ others, your own pay should not be disproportionately low compared with employees performing similar functions.

Example Of A Reasonable Salary Calculation

Sarah runs a digital marketing company through a Pty Ltd structure, generating $500,000 in annual revenue. She is the sole director and actively manages all client campaigns and operations.

Research shows that a digital marketing manager in her region typically earns around $100,000 per year.

If Sarah pays herself only $40,000 and takes the rest as “drawings,” the ATO could argue this is not an arm’s-length arrangement. This could trigger Division 7A issues or PSI attribution rules, leading to back taxes, penalties, and compulsory superannuation payments.

A reasonable approach is for Sarah to pay herself a salary close to the $100,000 market benchmark. Any remaining company profits can then be paid out as dividends, subject to company tax and franking credit rules.

How To Set A Reasonable Salary: Key Strategies

1. Do Your Research
   Benchmark your salary using Fair Work pay guides, recruitment data, or industry surveys.
2. Keep Detailed Records
   Document the basis for your salary—include job descriptions, time spent, industry data, and financial capacity of the business.
3. Pay Superannuation
   Don’t forget to pay yourself the superannuation guarantee (currently 11.5% in 2024–25) on top of your wages, just as you would for any other employee.
4. Use a Proper Payroll System
   Even if you’re the sole director, run payroll correctly with PAYG withholding, payslips, and Single Touch Payroll (STP) reporting to the ATO.
5. Consult a Tax Professional
   Because what is “reasonable” can depend on your industry and business structure, it’s best to seek advice from a registered tax agent or accountant.

Best Practices For Company Directors’ Pay

• Salary first, dividends second: Pay yourself a fair wage (subject to PAYG tax and super) before distributing retained profits as dividends.
• Avoid “loan accounts” or drawings: Taking money from the company without recording it as salary, wages, or dividends may be treated as a Division 7A loan, creating tax liabilities.
• Stay compliant with employment law: As a director/employee, you’re still subject to workplace entitlements such as super and possibly workers’ compensation insurance.

Real-World Example:

Peter owns a digital marketing agency through a company. Initially, he was paying himself just $40,000 per year, despite company profits of over $200,000. His accountant flagged this as a risk under Division 7A and PSI rules.

After reviewing industry benchmarks, Peter adjusted his salary to $100,000 plus superannuation, which reflected the going rate for his role. The remaining profits were distributed as dividends, with franking credits applied.

This approach not only kept him compliant with ATO expectations but also positioned his business for sustainable growth without tax complications.

Determining how much to pay yourself as a small business owner is a critical decision that influences not only your personal financial well-being but also the health and sustainability of your business. It’s about striking the right balance between covering your personal needs and reinvesting in your business.

By considering your business structure, profitability, and personal financial requirements, you can set a compensation strategy that supports both growth and tax compliance. The key is to be proactive, keep accurate records, and ensure that your salary or draw is reasonable, reflecting both your responsibilities and market standards. Don’t forget to account for taxes, superannuation, and other obligations to avoid future complications.