One of the most important (but often overlooked) aspects of running your company is addressing the question, “How much should I pay myself?” .The whole point of starting a business is typically to create financial freedom and security for yourself and your family. But it’s easy to get caught up in the day-to-day operations and forget to take care of your own paycheck.
How to Pay Yourself as a Business Owner
As a small business owner, you have two main methods of paying yourself: an owner’s drawing or a regular salary. Each approach has its own unique benefits and considerations.
Taking an owner’s draw involves withdrawing money directly from your business’s profits as needed. This offers more flexibility, allowing you to access funds when your company performs well and hold off when cash flow is tight.
The downside is you’re responsible for setting aside the appropriate amount for taxes yourself.
Alternatively, you can pay yourself a regular salary, just like any other employee. The key benefit is the steady, predictable income, making budgeting and managing your personal finances much easier.
Plus, with a salary, your taxes are automatically deducted upfront. However, this approach also means you must continue paying yourself even if your business is experiencing a temporary downturn. This could be risky for newer entrepreneurs who still need to gain a reliable sense of their company’s revenue patterns and annual profitability.
Ultimately, learning how to pay yourself as a business owner and choosing between an owner’s draw and a salary will depend on your unique business, your business structure, and your financial circumstances.
The most important thing is to be thoughtful and intentional about how you compensate yourself to ensure your company's long-term sustainability and financial well-being.
How Much and When Should I Pay Myself?
Unfortunately, there’s no one-size-fits-all answer. It depends on a few critical factors:
The business’s profitability
Your living expenses and personal financial goals
The business’s growth goals
The business’s structure ( sole proprietorship, Company, etc.)
What’s most important, is to start compensating yourself in a regular, consistent way rather than waiting until your company is highly profitable. Even if the initial salary is modest, paying yourself sends an important signal — that you, the business owner, are a vital part of the organization and deserve to be compensated for your work.
The Importance of Consistency
Let’s look at some easy steps you can take to pay yourself consistently:
1. SEPARATE YOUR PERSONAL AND BUSINESS FINANCES
One of the biggest mistakes business owners make is not keeping their personal and business finances completely separate. It’s essential that you have a dedicated business current and savings account that you use solely for your company’s transactions.
Keeping finances separate makes it easier to track your income and expenses and helps prevent you from accidentally “dipping into” your business funds for personal reasons. Separate accounts will also help to ensure you are on the right side with SARS or the IRS.
Also read:
How to keep your business and personal finances separate
Why it's important to keep your business and personal finances seperate
2. SET A SCHEDULE
Set a regular payment schedule. Consistency is key. Decide whether you’ll pay yourself weekly, bi-weekly, or monthly, and stick to it. This will help you manage your personal finances better and give you a clear picture of your business’s cash flow.
3. PLAN FOR TAXES
Paying yourself a regular salary has some distinct advantages when it comes to taxes. By treating yourself like an employee and running your pay through a formal payroll system, income taxes and employment taxes can be automatically withheld from each paycheck.
This takes the hassle out of tax planning and ensures you set aside the appropriate amounts throughout the year.
Partnering with a reputable payroll service provider like HM Accounting can alleviate the burden. Our team of experts can manage all your payroll needs, from registrations and submissions to calculations and compliance monitoring. With HM Accounting, you can rest assured that your payroll processes are in capable hands - contact us here
4. REVISIT AND REASSESS
Your business and your financial needs will evolve over time. Don’t be afraid to revisit your self-compensation plan regularly. Here are some items to consider during reassessments:
Have your business’s profits increased significantly? If so, you can bump up your salary a bit.
Are you facing a temporary financial squeeze? You might need to adjust your salary temporarily to prioritize business needs.
Have your life circumstances changed? Maybe you have a growing family or unexpected expenses. Factor these in when reassessing your income needs.
Regularly evaluating your compensation plan can help ensure that you continue to meet the needs of yourself and your business.
The Importance of Paying Yourself
Why is paying yourself so crucial? Beyond the obvious reason of needing to eat, it also reinforces the value of your work and establishes healthy financial habits for your business.
Financial Stability for You: A consistent income stream allows you to pay bills, plan for the future, and (dare I say) even enjoy a guilt-free vacation.
Planning and Growth for Your Business: When you know exactly how much you're taking out each month, you can create a realistic budget for the business. Without the expense of your salary, you don’t have an accurate picture of your actual expenses.
Taxes, Glorious Taxes (Okay, Maybe Not): Establishing a regular payment system allows you to set aside money for estimated taxes throughout the year. This helps avoid that end-of-year scramble (and potential penalties) .
Paying yourself is a sign that your business is sustainable and growing. It’s the entrepreneur’s version of self-care. Additionally, it can improve your morale and motivate you to continue pushing your business to new heights. Think of it as a tangible measure of success and a reward for your hard work.
HM Accounting Can Help
Paying yourself consistently as a small business owner is essential for your personal financial security and the long-term health of your company. Maintaining a clear division of personal and business finances is a crucial first step towards paying yourself consistently and taking control of your company’s financial health.
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GET YOUR OWNERS PAY CALCULATOR - FOR SOLE TRADERS
This template has been specifically designed to aid sole proprietors in calculating monthly drawings for themselves from the business.
The template takes into consideration business turnover as well as personal living expenses for the month.
A separate template has also been created to track the monthly, quarterly and annual turnovers and assist business owners keep track of their sales and set goals accordingly.
This template is easy to use and business owners worldwide may use it.
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