Are You Paying Yourself Correctly as a Business Owner?

Here's a question we ask almost every new small business owner we work with: how are you paying yourself? The answers we get range from "I just take money when I need it" to "I haven't paid myself at all yet." Both of those are problems — and they're more common than you'd think. Paying yourself correctly isn't just about having money in your pocket. It affects your taxes, your financial planning, and the long-term health of your business.

Why It Matters

When you don't pay yourself a consistent, documented amount, several things go wrong. Your personal finances become unpredictable. Your business cash flow is hard to track. You may underpay (or overpay) self-employment taxes. And it's harder to qualify for loans or mortgages because your income looks inconsistent.

How You Should Pay Yourself

Depends on Your Business Structure

• Sole Proprietor or Single-Member LLC

  • You pay yourself through what's called an owner's draw — you transfer money from your business account to your personal account. This is simple, but make sure you're setting aside 25-30% for taxes, since nothing is withheld automatically.

• S-Corporation

  • If you've elected S-Corp status, you're required by the IRS to pay yourself a reasonable salary as a W-2 employee of your own company, and then you can take additional distributions. This is a tax planning strategy many small business owners use to reduce self-employment tax.

• Partnership or Multi-Member LLC

  • Partners typically take guaranteed payments or draws based on their ownership percentage. The details depend on your operating agreement.

    
    

"What Is a "Reasonable Salary"?

If you're an S-Corp, the IRS requires your salary to reflect what you'd pay someone else to do your job. Underpaying yourself to avoid payroll taxes is a red flag for auditors. A good rule of thumb: if your business profits are $100,000, a salary of $50,000-$60,000 is often considered reasonable.

Set Up a System

Whatever your business structure, we recommend setting up a consistent payment schedule — weekly or bi-weekly, just like a real paycheck. This creates predictability for both your personal finances and your business cash flow.

Not Sure How to Set This Up?

This is one of our specialties at MeiDay Accounting. We help small business owners structure their pay to minimize taxes and maximize financial stability. Book a free call today!