Are You Paying Yourself Enough?

How Much Should You Pay Yourself as a Business Owner?

One of the most common challenges entrepreneurs face is figuring out how much to pay themselves. More often than not, the answer is simple: most business owners are not paying themselves correctly. In many cases, they are underpaid, and in a few situations, overpaid. Very few land in the right range.

So how do you determine the right number, and make sure you’re doing it in a way that supports both your personal income and your business health?

Start With a Reality Check: You’re Likely Underpaid

Many entrepreneurs treat the owner’s pay as whatever is left over after expenses. The problem with this approach is that it often leads to inconsistent or insufficient income for the business owner.

A healthier approach is to treat your compensation as a structured part of your business model, not an afterthought. In general, many small businesses fall into a range where owner compensation is roughly 35% to 50% of gross revenue, depending on the industry, stage of business, and operating costs.

This isn’t a fixed rule, but it’s a helpful benchmark to start from.

Your Business Structure Matters 

How you pay yourself depends heavily on how your business is legally structured.

▶️ S-Corps and C-Corps: The “Reasonable Salary” Rule

If your business is taxed as an S-Corporation or C-Corporation, the IRS requires you to pay yourself a “reasonable salary.”

This means your salary should reflect:

• Your qualifications and experience

• The scope of your responsibilities

• Hours worked in the business

• Industry standards for similar roles

• Your company’s revenue

Once you determine a reasonable salary, you pay yourself through payroll and can also take additional distributions.

However, there’s an important catch: distributions are only tax-efficient if your salary is considered reasonable. If your salary is too low, the IRS may reclassify your distributions as wages, which can result in additional taxes and penalties.

For example:

• If your business earns $100,000 and you pay yourself $10,000 in salary, that may raise red flags.

• If you pay yourself $50,000 in salary, that is more likely to be viewed as reasonable, with remaining profits taken as distributions.

The goal is balance—not minimizing salary to reduce taxes at the expense of compliance.

LLCs, Sole Proprietors, and DBAs: Simpler but Less Structured

If you operate as an LLC (taxed as a sole proprietor), sole proprietorship, or DBA, your situation is more flexible.

In these pass-through entities, the IRS does not treat owner draws as wages. Instead, all business profit is considered your income for tax purposes, regardless of how much you actually withdraw.

This means:

• You can take money out of the business at any time

• Your “pay” is not formally defined as a salary

• Taxes are based on total business profit, not withdrawals

While this flexibility is helpful, it can also lead to inconsistent personal income if not managed carefully.

A Practical Method: Pay Yourself a Percentage

For many LLCs and sole proprietors, a practical approach is to assign yourself a consistent percentage of gross revenue.

A commonly used range is: 35% to 50% of gross revenue

Where you land in that range depends on:

• How long you’ve been in business

• Your revenue level

• Your operating expenses

• Your personal income needs

Once you choose a percentage, the key is consistency. Many business owners create an “Owner’s Pay” account and transfer a set amount into it on a weekly or bi-weekly schedule.

This helps stabilize personal income while keeping the business financially disciplined.

Why Paying Yourself Properly Matters

Getting owner compensation right is not just about personal income—it directly impacts your business health.

If you underpay yourself:

• You risk burnout and financial stress

• You may underreport the true cost of running the business

• You limit your personal financial growth

If you overpay yourself:

• You may strain cash flow

• You reduce reinvestment into the business

• You risk operational instability

The goal is to find a sustainable balance where both you and the business can thrive.

Paying yourself should not be random or emotional. It should be strategic. Whether you’re setting a reasonable salary under IRS rules or using a percentage-based approach, the key is consistency, compliance, and clarity.

When you treat your compensation as a deliberate financial decision, you stop guessing—and start building a business that supports you, not just the other way around.