Q&A: How Much Should I Pay Myself?

By Joanna L. KrotzBusiness on Main

My business is almost a year old now and doing well, although it's still not turning a profit. How much should I pay myself, especially when the business is still running on money from investors and loans?

As the owner, you can pretty much cut your own paycheck, barring some rules that kick in for certain business structures. The two driving factors to decide about pay are:

Continue Reading Below

1) Amount and frequency

2) Method of payment

You also want to balance business needs with your lifestyle and family demands. But always get your accountant’s advice, and then choose among these options:

Salary or draw: Before setting up monthly or weekly wages, consider how you run the business. If you use your Social Security number to report business income, you can get paid directly. But if you’ve incorporated, how much you can draw depends on the kind of structure you chose. (See IRS guidelines on business structures and paying yourself.)

Lump-sum bonus: Tax rules are roughly the same for a quarterly or annual bonus as they are for a regular draw. Just check with your accountant before taking a big reward, as you want to avoid triggering unwanted IRS attention.

Dividend distribution: As a profitable incorporated business, you can declare a dividend and reward yourself with an annual amount. But if you’re a private company — that is, you haven’t sold any stock — distributing dividends throws up some challenges. Get advice before setting this up.

Hiring family: Family members who work for the company can be paid like any other employee. If your teenager works part time, you can pay hourly wages or fair market value.

Perks and benefits: The IRS permits owners to deduct a rash of expenses as the cost of doing business. That could include club memberships, company cars, business trips, client dining and entertainment, and more. You must explain how such expenses contribute to the business, and you must maintain strict control over receipts and records. Do not, on any account, muddle business expenses with personal ones.

Delayed compensation: If you’re tightening your business belt, you can forgo pay for a while and reap later benefits. Make sure to record your intentions in company accounting books.

Employee benefits: Tax-deductible employee benefits can bolster your annual pay. These can include health, dental or group life insurance, a SEP-IRA tax-deferred retirement account, paid holidays and sick leave.

Taking a loan: The IRS takes a dim view of owners who use biz revenue to fund their personal lives. So if you take a company loan, document it and set up a serious repayment schedule with the going rate of interest.

What do you think?

Click the button below to comment on this article.