Dr. Paul Borosky, DBA, MBA
Business Consultant & Author
Guide 7 of 11 · Pay Yourself
How Much Should I Pay Myself as a Small Business Owner?
Pay the owner first. Then see if the business made a profit.
Most owners pay themselves whatever the bank balance seems to allow, whenever it seems to allow it. The result is a family budget that swings every month and a tax bill that surprises everyone. A fair wage, a family budget that lives on it, and a quarterly formula for the rest fix all three.
Last Updated: 10/27/2026 · Written by Dr. Paul Borosky, DBA, MBA
The Short Answer
How Much Should a Small Business Owner Pay Themselves?
Textbook Definition
Owner compensation is the wage, draws, or distributions an owner takes from the business. In an S-corporation, the IRS expects a reasonable salary for the work the owner does, with remaining profit taken as distributions.
In Plain English
Pay yourself what you would have to pay someone else to do your job. Run your family on that paycheck. Then take a share of whatever profit is left, once a quarter, by a formula, not by how the bank balance feels.
Quarterly Distribution
Quarter’s profit − tax set-aside − reserve top-up
Ridgeline, Q1 of Year 4: $6,000
If the answer is zero or negative, the distribution is zero. The salary still gets paid. That is the whole point. For the tax side of the formula, see how much to set aside for taxes.
How You Get Paid
Draws, Salary, or Distributions: Which Applies to You?
It depends on how the business is set up. This is general. Your CPA decides what fits you.
| Setup | How the owner is paid |
|---|---|
| Sole owner or single-member LLC | Draws, any time. No payroll. Income and self-employment tax on the whole profit, taken out or not. |
| S-corporation | A regular salary through payroll, plus distributions of the profit that is left. |
An S-corporation salary has to be reasonable for the work you do. Pay yourself too little to turn wages into distributions, and you may owe back taxes, interest, and penalties.
Show the Math
Everything Ridgeline Paid Its Owner, Year by Year
Ridgeline Landscaping is the fictional business that runs through the book. Mike, the owner, paid himself the way most owners do, until Year 3.
| Year | How | Paid to Mike | Business profit |
|---|---|---|---|
| Year 1 | Draws | $68,800 | $66,500 |
| Year 2 | Draws (incl. $14,000 of Year 1 tax) | $54,000 | $83,000 |
| Year 3 | Salary $60,000 + distributions | $85,500 | $73,000 after salary |
| Year 4 plan | Salary $80,000 + distributions | about $109,700 | about $72,000 after salary |
Fictional figures from the book. In Year 1, Mike took more than the business made.
The Method
How to Set Your Pay in 5 Steps
Add up everything you took out last year.
Salary, draws, distributions, and any personal bills the business paid. Put the total next to the profit. Did you take more than the business earned?
Price your own job.
What would it cost to hire someone to do what you do? Mike now sells, bids, and runs three crews. An operations manager for that job costs about $80,000 a year in his area. That became his salary.
Run the family budget on the salary alone.
Mortgage, groceries, insurance, school fees: all of it comes from the paycheck. Distributions are a bonus, spent on things with a date and a choice.
Take distributions once a quarter, by formula.
Profit after salary, minus the tax set-aside, minus the reserve top-up. Take what the formula says, not what the bank balance says.
Check what your money earns inside the business.
Return on equity is net profit divided by owner’s equity. If the business earns more on it than anything else you could do, let it work.
Why Early Profit Is Really Your Wage
In Year 1, Ridgeline made $66,500. But Mike did most of the work himself, and his labor was not an expense. The “profit” was his wage. By Year 3 his $60,000 salary was on the books, and the business still made $73,000 on top. That is the test: after a fair wage, is anything left? Owners who sell learn this the hard way. A buyer subtracts your wage before valuing your profit. See gross margin vs. net margin for where your wage sits.
Is Your Money Working?
Return on Equity: Should You Leave the Money In?
Every dollar you do not take out stays in the business as equity. Before you pull more out, ask what it earns sitting there.
| Year | Net profit | Owner’s equity | Return on equity |
|---|---|---|---|
| Year 1 | $66,500 | $27,700 | 240% |
| Year 2 | $83,000 | $56,700 | 146% |
| Year 3 | $73,000 | $104,200 | 70% |
| Year 4 plan | $72,000 | $146,500 | 49% |
Years 1 and 2 are inflated, because Mike’s wage was hiding inside the profit.
49% still beats a savings account by a mile. That is a reason not to pull everything out, and a reason every dollar left in needs a job. Idle cash drags the return down. Public companies show the same math on a bigger scale in ROA vs. ROE.
Owner Warning
What Goes Wrong When Owners Pay Themselves by Feel?
- Taking more out than the business earned, like Ridgeline in Year 1.
- Paying yourself nothing and calling the leftover “profit.”
- Setting an S-corporation salary too low to dodge payroll taxes.
- Building the family budget on distributions that can drop to zero.
- Paying last year’s tax bill out of this quarter’s cash, by surprise.
- Pulling money out without asking what it earns inside the business.
From the Book
The Test Every Owner Has to Pass
Chapter 16 · Paying Yourself
Why Early Profit Is Really Your Wage
That’s the test for any small business: after you pay yourself a fair wage for the work you do, is anything left? If not, you don’t have a profitable business yet. You have a job that owns equipment.
Salary, distributions, the family budget rule, and return on equity, all worked through Ridgeline’s numbers. Get the book.
Get the Book on Amazon →Want a Second Set of Eyes on Your Pay?
Owner pay touches taxes, cash, and the reserve at once. Start with how much cash reserve to keep. If you want someone to set the salary and the formula with you, and run it every quarter, Dr. Paul works with owners as a part-time financial lead. See fractional CFO services.
Beyond the Book
Need Help With Your Own Numbers?
Do it yourself, hand it off, or work through it together.
Business Plan Templates
The statements, prebuilt. A Word plan plus an Excel model for your industry.
See the Templates →Business Plan Writing
Hand it off. Dr. Paul writes the plan and the numbers that back it up.
See Plan Writing →Business Consulting
Straight answers on the numbers that run your business, from Dr. Paul.
See Consulting Options →FAQ
Owner Pay Questions
Should a small business owner take a salary or a draw?
How much should I pay myself from my business?
What is a reasonable salary for an S-corp owner?
Is it bad to not pay yourself from your business?
Keep Going
Related Guides
The full playbook, from startup costs to the 13-week forecast: the small business finance guide.
Written by Dr. Paul Borosky, DBA, MBA, business consultant, author, and adjunct finance instructor with an MBA focused in finance.
This page is for general educational purposes only. It is not legal, financial, tax, accounting, or lending advice. Tax rules change by place and by year. Ridgeline Landscaping and its figures are a fictional illustration from the book, not a projection for your business. For decisions about your own business, consult a qualified professional.