How Much Should You Actually Pay Yourself as a Small Business Owner?

One of the strange things about becoming a business owner is that suddenly nobody tells you what your paycheque should be.

Employees know when they’re getting paid.

Business owners often just move money from the business account to their personal account and hope they’re doing it correctly.

But how much should you actually pay yourself?

And should you take a salary, dividends, or some combination?

There isn’t one answer that works for every business owner.

The right approach depends on factors including your business structure, profitability, cash flow, personal financial needs, and tax circumstances.

First: Your Business Bank Account Isn’t Your Personal Wallet

This is an important starting point.

If you own a corporation, the company’s money and your personal money are not the same thing.

Even though you own the company, that doesn’t mean every dollar in the corporate bank account is yours to spend personally.

Money taken from the business needs to be accounted for appropriately.

This is one reason maintaining separate personal and business finances is so important.

Salary vs. Dividends

For incorporated business owners, one of the major questions is whether to pay yourself through salary, dividends, or potentially a combination.

Each method has different tax and administrative considerations.

Salary is generally treated as employment income and involves payroll.

Dividends are distributions from corporate after-tax income and have their own tax treatment.

There can also be differences involving CPP, personal tax planning, corporate tax, retirement savings, and other considerations.

This isn’t a decision that should be based on a generic internet rule saying one option is “always better.”

There Is No Magic Percentage

You may hear advice such as:

“Pay yourself 30% of revenue.”

Or:

“Take everything above $X.”

Be careful with formulas like these.

A consulting company with very low overhead has a completely different financial structure from a restaurant with large payroll and inventory costs.

The amount you can reasonably pay yourself depends on the economics of your business.

Start With Business Cash Flow

Before deciding how much money to take out, understand what the business needs to operate.

Look at:

• Payroll
• Rent
• Suppliers
• Taxes
• HST
• Debt payments
• Operating expenses
• Upcoming purchases
• Cash reserves

Then consider what’s actually available.

A business that has $100,000 in the bank doesn’t necessarily have $100,000 available for the owner.

Pay Yourself Consistently

One useful approach for many business owners is establishing a consistent process.

Instead of randomly taking money whenever the bank balance looks healthy, establish a planned compensation strategy.

This makes personal budgeting easier and gives the business more predictable cash flow.

It also makes the accounting cleaner.

Don’t Ignore Your Personal Financial Needs

Your business exists partly to support your financial goals.

So don’t make the mistake of keeping every dollar in the company simply because you’re afraid to take money out.

You need to understand your personal financial requirements as well.

How much do you need for:

• Housing
• Food
• Transportation
• Savings
• Debt
• Investments
• Lifestyle expenses

Then work with your accountant to determine how compensation can fit within both your personal and corporate financial picture.

What About Leaving Money in the Corporation?

Sometimes a business owner doesn’t need all of the company’s profits personally.

Leaving funds in the corporation may allow the business to maintain working capital or fund future growth, depending on the circumstances.

For example, you might be planning to:

• Hire employees
• Purchase equipment
• Open another location
• Build a cash reserve
• Invest in the business

Keeping cash inside the company can be useful.

But the tax and legal implications should be considered.

Don’t Use Your Business Account to Fund Your Lifestyle Randomly

This creates bookkeeping problems and can complicate tax reporting.

If you’re regularly transferring money from your business account to your personal account without recording what those transfers represent, your books can become difficult to reconcile.

Every owner transaction should be properly categorized.

The Importance of Planning

Compensation decisions should ideally be made before the end of the year—not after you’ve already taken money out in random amounts.

Your accountant can look at the company’s financial results, expected taxes, personal circumstances, and other factors and help you understand the available options.

The earlier you plan, the more options you may have.

What About New Business Owners?

If your business is brand new, don’t focus too heavily on maximizing your personal withdrawals immediately.

Your first priority should be ensuring the business can survive and operate.

You need enough working capital to handle normal fluctuations.

A business that distributes too much cash early can find itself short of money when an unexpected expense appears.

Review Your Compensation as the Business Changes

Your compensation strategy shouldn’t necessarily stay the same forever.

Your business may go from:

$100,000 revenue → $300,000 → $750,000 → $1 million.

Your expenses, staff, cash flow, and tax position may change along the way.

Review your compensation strategy periodically.

The Bottom Line

There is no universal answer to the question:

“How much should I pay myself?”

And there shouldn’t be.

The answer depends on your business and your circumstances.

Understand your cash flow.

Keep personal and business finances separate.

Consider the differences between salary and dividends if you’re incorporated.

Plan rather than randomly withdrawing money.

Maintain sufficient working capital.

And review the strategy as your business grows.

At BBS Accounting, compensation planning can be considered alongside your bookkeeping, financial statements, and tax planning so your decisions are based on the complete financial picture.

Because paying yourself isn’t just about taking money out of the business.

It’s about creating a sustainable system that works for both you and the company you’ve built.