I’m a Business Owner. How Much Should I Pay Myself?‍
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Being a business owner is like being the main character in your own film. Sometimes you’re on cloud nine, and other times, you’re figuring out what you can actually afford. One of the trickiest questions out there? “How much should I pay myself?”

Pay yourself too little, and you’ll feel like you’re endlessly waiting for the “happily ever after.” Pay yourself too much, and you might put your business at risk. But with a little guidance, you can strike a balance that supports both your personal and business goals. Here’s the rundown on paying yourself as a business owner.

Step 1: Understand Your Business Structure (Yes, It Matters)

How you pay yourself actually depends a lot on your business structure. 

• Sole Proprietorship: You and your business are financially one and the same. This means profits are your income, and you can draw funds whenever you need. Just remember to set aside money for taxes.
• LLC (Limited Liability Company): An LLC keeps you legally separate from your business, which adds a layer of protection. You can pay yourself with a salary or owner’s draw, depending on how your LLC is set up.
• Corporation: This is like the high-maintenance option in the business structure world. You’re technically an employee of your business, so you’ll likely need to pay yourself a salary. It’s the ultimate formal approach.

Tip: If you’re unsure which structure suits your goals, consult a financial expert to avoid surprises down the line.

Step 2: Choose How You’ll Pay Yourself

Once you know your structure, it’s time to decide on your method of compensation. 

1. Salary: Paying yourself a regular salary gives you predictability and makes it easier to budget personally. It’s consistent, easy to plan around, and helps establish a clear boundary between you and your business.

1. Dividends: If you’re a shareholder, dividends offer a way to receive a portion of profits without going through payroll. Dividends aren’t subject to self-employment taxes, making them a more tax-friendly option. Just remember: you can only pay dividends if there are actual profits.
2. Combination of Salary and Dividends: Many business owners opt for a mix, paying themselves a smaller salary to cover personal basics and taking dividends when the business profits. It’s flexible, but you’ll want to plan carefully to avoid a tax surprise.

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Step 3: Consider Key Factors Before Deciding Your Pay

When it comes to paying yourself, think about your lifestyle, business health, and long-term goals. Here are some questions to help you hit the sweet spot:

• Is My Business Profitable? Make sure you’re bringing in enough profit to pay yourself comfortably without straining the business. Set up a regular profit review to keep tabs.
• What Are the Tax Implications? Taxes may not be the most glamorous thing, but they’re a big part of the picture. Understand how each method impacts your tax situation, and talk to a tax advisor if you need clarity.
• What Do I Need Personally? Start with your basic living expenses, and go from there. Are you covering what you need, or is it time for a pay raise? Balancing this with what’s reasonable for your business is the key.
• Should I Reinvest? Maybe you want to put money back into the business for growth. This is where a reinvestment strategy comes into play. Think about your priorities—taking a little less now could pay off in the long run if it means your business will grow.
• Avoid Burnout: Not paying yourself can quickly lead to burnout. Even if you start with a modest monthly payment, it’s essential to recognize your hard work and avoid the stress of constantly putting yourself last. 

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Step 4: Calculate What You Can Afford

So, you know how you’ll pay yourself and what factors are in play. Now it’s time to break out the calculator. Here’s a simple way to find a starting point:

1. Check Your Profit: Start with your business’s monthly or quarterly profit. This is what you can afford to work with after expenses.
2. Set Aside for Taxes: Calculate how much you’ll owe in taxes based on your income. Aim to set aside 20–30% for taxes to stay safe.
3. Leave Room for Reinvestment: Decide on an amount you want to reinvest for future growth. Whether it’s new equipment, marketing, or expansion, reinvestment is essential for any growing business.
4. Determine Your “Take-Home” Amount: What’s left? This is what you can reasonably pay yourself, whether it’s through a salary, dividends, or a combination of both.

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Step 5: Document Your Compensation Decisions

Consistency and record-keeping are key when paying yourself. Maintaining records not only simplifies tax time but also helps if you ever need a loan or investment. Think of it like a diary for your business finances—you’ll thank yourself later.

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