As a small business owner, you wear many hats—CEO, marketer, accountant, and sometimes even janitor. But one role often overlooked is that of an employee. Paying yourself a salary isn’t just about personal income, it’s a critical step toward building a sustainable business. So, how much should you pay yourself, and why is it so important?

The risk of mixing business and personal finances

One of the biggest mistakes small business owners make is blurring the line between business and personal money. Using the same account for both can lead to:

• Tax Headaches: Combining funds makes it harder to track deductible expenses and can raise red flags during an audit.
• Legal Liability: If your business is an LLC or corporation, mixing funds can jeopardize your liability protection.
• Financial Confusion: Without clear separation, it’s nearly impossible to know if your business is truly profitable.

Paying yourself a set salary helps maintain this separation. It creates a clear record of compensation, simplifies bookkeeping, and reinforces the professional structure of your business. In short, paying yourself isn’t just about income—it’s about protecting your business and your peace of mind.

The case for paying yourself a salary

Many entrepreneurs delay paying themselves, thinking it’s better to reinvest every dollar back into the business. While that might seem noble, it’s not sustainable. Here’s why:

• Financial Health Indicator: If your business can’t afford to pay you, it may not be as healthy as you think. A viable business should generate enough profit to compensate its owner.
• Avoid Burnout: Working without pay leads to stress and resentment. Regular compensation helps maintain motivation and commitment.
• Personal Financial Stability: Paying yourself allows you to cover living expenses, build credit, and contribute to retirement savings. Your business should support your life—not the other way around.
• Professionalism and Compliance: For certain business structures, like S corporations, the IRS requires owners to take a “reasonable salary” to avoid tax penalties.

So, how much should you pay yourself?

There's no one-size-fits-all answer to this question, but here are some practical approaches that may work for you and your business:

1. Base it on your personal needs

Start by creating a personal budget. Determine the minimum amount you need to cover essential expenses like housing, utilities, and insurance. This ensures your salary supports your lifestyle without draining the business.

2. Consider business performance

Your salary should reflect what your business can afford. Calculate your net income (revenue minus expenses) and set aside funds for taxes and debt before deciding on your pay. A common rule of thumb is to allocate 30% of net income for taxes and then determine your take-home pay from what’s left.

3. Use industry benchmarks

Research what others in similar roles earn. For example, U.S. small business owners make an average of about $75,000 annually according to payscale.com, though this varies by industry and location.

4. Apply the profit percentage method

Some recommend paying yourself a fixed percentage of profits—say 30%—so your compensation scales with business performance. This method can also give you more of an incentive to grow your business.

Final thoughts

Paying yourself isn’t selfish—it’s smart business. It signals that your company is financially sound and respects the value you bring. Start with what you need, adjust as your business grows, and review your compensation regularly. Remember: you’re not just an owner; you’re your company’s most valuable employee.

For additional support with determining your salary or assessing the financial health of your company, schedule a free Business Needs Assessment with one of our knowledgeable business bankers.