How to Determine Your Salary as a Business Owner

Running a business means making many decisions. One is how much to pay yourself. Let's explore how to set a fair salary for yourself. Also, we'll look at ways to withdraw money from your business.

How to Pay Yourself

When you own a business, there are different ways you can get paid, depending on what type of business you have. Here are the main ways:

1. W-2 Wages

If your business is a corporation, you can pay yourself through W-2 wages. This is like getting a regular paycheck, like you would if you worked for someone else. Your business will take out taxes from your paycheck and send them to the government. This helps keep things organized and makes sure you’re paying the right amount of taxes.

2. Distributions

If your business is a sole proprietorship or a partnership, you might not pay yourself with W-2 wages. Instead, you can take money out of the business through distributions. Distributions are when you take a share of the business’s profits. You don’t get a regular paycheck, but you can take out money as needed.

How to Decide What to Pay Yourself

1. Look at what the business can afford.

First, you need to see how much money your business is making. If the business is making a lot of money, you can pay yourself more. If the business is starting or isn’t making much yet, you might need to pay yourself less.

2. Find Out What’s Fair

You should also think about what is a fair amount to pay yourself. You can look at what other people in similar jobs make. For example, if you’re doing the same work as a manager or an employee in a similar business, see how much they get paid. This helps you set a reasonable amount for yourself.

3. Talk to an expert.

It can be a good idea to talk to an accountant or a financial expert. They can run a wage analysis report to help you figure out a fair salary and make sure you’re following all the tax rules.

Other Ways to Get Money Out of Your Business

Besides paying yourself with wages or distributions, there are other ways to take money out of your business:

1. Owner’s Draw

For some businesses, like sole proprietorships and partnerships, you can take an owner's draw. This means you take money out of the business’s profits without paying yourself a regular salary. This resembles distributing, but you can do it more often.

2. Dividends

If your business is a corporation, you might be able to pay yourself with dividends. Owners or shareholders receive dividends, which are a share of the company's profits. This is another way to get money out of the business.

Conclusion

Deciding how much to pay yourself is a key part of managing your business. Whether you use W-2 wages, distributions, or other methods, it’s important to find a balance that supports both your personal needs and your business’s health. For some business types, like S corporations and C corporations, paying yourself through W-2 wages is not just a choice but a compliance requirement. Ensuring you follow these rules helps avoid legal issues and keeps your business in good standing. If you’re unsure about the best approach or compliance requirements, consulting a professional can guide you in making the right decision.

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If you have children, read our How to 'Pay Your Children from Your Business: IRS Rules and Best Practices' article next!