How to pay yourself as a business owner

Pay yourself two ways. A set wage for the job you do in the business, on a schedule like anyone else on payroll. Then a return for owning it, paid from profit after the books close.

Most owners do neither. They take what's left at the end of the month, which makes them the one line in the budget that never gets planned.

The misread

"I'll pay myself once the business can afford it."

The reality is a business that can't afford its owner can't afford the job the owner is doing. If you had to hire someone to do your role tomorrow, you'd have to pay them. That cost is already there. You're just covering it for free and calling it profit.

That's how a business shows a profit on paper while the owner hasn't had a real paycheck in a year.

Check one: the wage for the job

Write down what you actually do every week. Selling, delivering, managing the team, running the books. Then ask what you'd pay a person to take that job off your plate.

That number is your wage. It's a cost of running the business, the same as any other salary, and it goes on the schedule. Same amount, same day, every pay period.

If the business can't cover it, that's not a reason to skip it. That's the most important number you'll find this year, because it means the business doesn't work yet without you subsidizing it.

Check two: the return for owning it

The second check is your return on the money and risk you have tied up in the business. It comes from profit, after the business is funded.

In From Traction to Freedom (Chapter 19) I split gross profit into three buckets:

• Operations, 50 to 65%: keep it alive. Salaries (yours included), rent, software, marketing.
• Investment, 20 to 30%: make it stronger. Hiring ahead, building systems, saving for the next move.
• Return, 15 to 25%: prove it's a real asset. This is the owner's return.

A worked example

Say your business does $800,000 in revenue with $480,000 in gross profit. (Made-up numbers to show the math.)

• Your job: you sell and run the team. Replacing you in that role would cost about $90,000. That's your wage.
• Operations target, 50 to 65% of gross profit: $240,000 to $312,000, with your $90,000 inside it.
• Investment, 20 to 30%: $96,000 to $144,000.
• Return, 15 to 25%: $72,000 to $120,000 a year.

So a healthy year pays this owner $90,000 for the job plus $72,000 to $120,000 for owning it. If Operations is eating 80% of gross profit, there is no Return, and the fix is in Operations, not in the owner's paycheck.

Owner's draw vs salary

How the money moves depends on how the business is set up. In general:

• Sole proprietors and most LLCs pay themselves with an owner's draw. There's no payroll, and taxes are paid on the business's profit, not on the draw.
• S corporations pay owners who work in the business a reasonable salary through payroll first. Profit above that can come out as distributions.
• C corporations pay working owners a salary, and profit comes out as dividends.

The rules and the tax bill differ by setup, so set this with your CPA. Gusto's guide to paying yourself walks through each structure. Either way, the two-check idea holds: a fixed amount for the work, a planned amount for the ownership.

The five-line worksheet

1. Gross profit, last 12 months: ______
2. What it would cost to replace you in your role: ______ (your wage)
3. Operations today, as a share of gross profit: ______%
4. Return range, 15 to 25% of line 1: ______ to ______
5. What you actually took last year, all in: ______

If line 5 is below line 2, the business is running on your free labor. If line 5 is above lines 2 and 4 combined, you're paying yourself out of the business's future.

Run your own numbers

The free Capital Allocation Calculator does lines 3 and 4 for you. Enter gross profit and what goes to each bucket, and it shows where you sit against the healthy ranges. About two minutes.

Your move this week

Fill in line 2. Just that one. What would it cost to replace you in the job you do every day?

Then put that amount on the schedule for next month, even if it's smaller than you'd like to start. A planned paycheck you can count on beats a big one you can't.

Not whatever's left. Two checks.

FAQ

How much should I pay myself? Start with what it would cost to hire someone into your role. That's your wage. On top of it, a return from profit; in my framework that's 15 to 25% of gross profit in a healthy year.

What's the difference between an owner's draw and a salary? A draw is money you take out of the business as its owner, common for sole proprietors and LLCs. A salary runs through payroll with taxes withheld, which S and C corporations use for working owners. Your CPA should set which one fits.

Should I pay myself if the business is barely profitable? Pay the wage for the job, even if it's smaller at first. If the business can't cover it, that's the number to fix, not the paycheck to skip.

How often should I pay myself? The wage on a fixed schedule, like payroll. The return after each month or quarter closes, once you know the profit is real.

Is paying myself a business expense? A salary through payroll usually is. An owner's draw usually isn't. Confirm with your CPA, because it depends on your setup.