What percentage of my small business income should I pay myself?
Asked by: Mina Bogisich | Last update: September 27, 2025Score: 4.6/5 (50 votes)
How much should a small business owner pay themselves?
No one set rule exists about how much an owner's draw should be and it's at the owner's discretion. Ideally, it should be a reasonable amount that allows the owner to cover their personal expenses while also leaving enough funds to cover a business's operating expenses and future investments.
What percentage of revenue should a small business owner make?
According to the SBA, most small business owners limit their salaries to 50% of their profits. That means if your business earns $100,000, your income should not exceed $50,000. For some business owners, the higher your company's profits, the higher your personal income.
Should I pay myself a salary from my LLC?
As a sole proprietor or a Single Member LLC, you should not pay yourself a traditional salary, instead you can take Owner Draws from your business profits. For tax efficiency, you may elect to file a S-Corp.
Do C Corp owners have to pay themselves a salary?
If your business is classified as a C corp, you are legally obligated to pay yourself a salary as a W-2 employee with the appropriate tax payments taken out. This is because C corps are owned by shareholders, which means its earnings are essentially “owned” by the company.
Salary for Small Business Owners: How to Pay Yourself & Which Method (Owner's Draw vs. Salary)?
What is the 60/40 rule for C corporation salary?
The IRS has said that if a C corporation is distributing profits to its owners and has not hired any other employees, it should follow the 60/40 rule. This rule states that 60 percent of the distribution should be treated as salary—and thus subject to payroll taxes—and the remaining 40 percent as dividends.
What is the most tax-efficient way to pay yourself?
Ways to pay yourself as a business owner
You deduct taxes upfront, which is a more stable choice since it's recurring and predictable. In an owner's draw, you transfer funds from the business to your personal account during regular internals or only when needed.
Is it better to take distributions or salary?
Distributions can be tempting because they aren't subject to payroll taxes, but taking too much in distributions without paying a reasonable W-2 salary can raise a red flag with the IRS. If the IRS determines that you've underpaid yourself in salary, you could face penalties, back taxes, and interest charges.
Can I transfer money from my LLC to my personal account?
Getting paid as a single-member LLC
This means you withdraw funds from your business for personal use. This is done by simply writing yourself a business check or (if your bank allows) transferring money from your business bank account to your personal account.
What is a good net income for a small business?
In general, 20% is a good profit margin goal for a new business. Most companies can expect to earn a profit margin of around 10% based on industry and economic factors. If your business has a lower profit margin, it's time to make changes to accelerate sales performance and decrease overhead.
How much should I pay myself from my paycheck?
The 80/20 rule breaks out putting 20% of your income toward savings (paying yourself) and 80% toward everything else. Once you've adjusted to that 20% or a number you're comfortable with saving, set up automatic payments to ensure you stick to it.
What is the pay yourself first rule?
Pay yourself first budgeting is sometimes referred to as "reverse budgeting" because your savings goals are prioritized instead of your expenses. The simplest explanation is that paying yourself first means depositing a portion of each paycheck directly into your savings. The remainder is then spent on your expenses.
Is it better to take owners draw or salary?
Advantages of owner's draw
Draws offer more flexibility. You can withdraw money as needed without sticking to a fixed payment schedule. You can manage cash flow more easily by adjusting your draws based on business performance — i.e., profitable months = more money, less profitable months = less money.
When should you start paying yourself from your business?
You can start paying yourself when your business starts making enough money to cover its expenses and generate a profit. It's important to make sure that your business is financially stable before you start paying yourself.
What is the best way to pay yourself from my LLC?
Instead, you pay yourself by taking money out of the LLC's profits as needed. That's called an owner's draw. You can simply write yourself a check or transfer the money for your business profits from your LLC's business bank account to your personal bank account. Easy as that!
Is it OK to transfer money from business account to personal account?
The short answer to the question is yes, individuals can withdraw funds from their business account for personal use; however, a detailed explanation is necessary to understand the intricate process of safely withdrawing money without significant financial consequences.
Do I have to pay taxes on money I put into my business account?
In most cases, your business does not pay taxes itself. Instead, earnings from your business— including money you pay yourself—“passes-through” to the personal tax returns (1040s) of the owners, and that is where it will be taxed.
What is a reasonable salary for an S Corp owner?
What is the 60/40 rule? The 60/40 rule is a simple approach that helps S corporation owners determine a reasonable salary for themselves. Using this formula, they divide their business income into two parts, with 60% designated as salary and 40% paid as shareholder distributions.
How much salary should I pay myself from my business?
First, subtract the cost of your business's expenses (such as employees' salaries, rent for your office space, etc.) from your gross revenue to find your net income. Once you subtract the amount of taxes to set aside, you will pull your pay from this figure.
Does owner's draw count as income?
You don't report an owner's draw on your tax return, but you do report all of your business income from which you make the draw. So, the money you take as an owner's draw will be taxed.
How does the owner of an LLC get paid?
LLC members, who are considered owners of the business, can't be on the regular payroll like regular employees. Instead, they receive their income in two main ways: by getting a share of the company's profits (known as taking a "draw") or by receiving a guaranteed payment for the services they provide to the LLC.
How do I pay myself if I am self-employed?
More specifically, if you're a sole proprietor, single-member LLC not filing an S Corp election, or partnership, you'll pay yourself through owner's draws. The IRS considers these types of entities as pass-through entities and the owners cannot be paid , m through regular payroll or wages.
What is an LLC taxed as an S Corp?
An S corporation is a pass-through entity for tax purposes. This means that if an LLC is taxed as an S corporation, the LLC doesn't pay corporate income tax. Instead, the LLC's profits pass through to the members, who report and pay tax on them when they file their personal income tax returns.