How Much Should I Pay Myself?

Jason Medlin
May 11
5 min read

Black-and-white photo representing business owner compensation and salary decisions

"How much should I pay myself?"

It's one of the most common questions I get from business owners. And one of the most emotionally loaded.

Some owners pay themselves whatever is left over after everything else is covered. Some feel guilty taking money out at all. Some have no idea what's reasonable and just guess. Some haven't given themselves a raise in years even though the business has grown.

Here's the thing: you built this business. You took the risk. You should be compensated fairly for both the work you do and the risk you took. But "fairly" needs a framework, not a feeling.

The Two Parts of Owner Compensation

Owner compensation has two components, and most people blend them together without realizing it.

1. Payment for your labor. This is what you'd have to pay someone else to do your job. If you're running operations, doing sales, managing projects, handling client relationships — that work has a market value. If you stepped away tomorrow and hired someone to replace you, what would you have to pay them?

2. Return on your ownership. This is your reward for building and owning the business. The risk you took, the capital you invested, the years of sweat equity. This is profit distribution — what's left after all expenses, including your salary, are paid.

Many business owners only think about one or the other. They either take a small salary and treat all profit as personal income, or they pay themselves a big salary and never think about profit as a separate thing.

Separating these two helps you think more clearly about what you're actually earning and why.

What's Your Market Rate?

Start with the labor component. What would it cost to replace you?

This isn't a hypothetical. It's a real number you can research. Look at:

→ What do similar roles pay in your market? (Operations manager, general manager, sales director — whatever most closely matches what you actually do)

→ What would you have to pay someone to take over your day-to-day responsibilities?

→ What were you earning before you started the business, adjusted for the years since?

For many small business owners, this number is somewhere between $60,000 and $150,000 depending on the industry, the market, and the complexity of the role. Some roles are worth more, some less.

This becomes your baseline salary. The amount you should pay yourself for the work you do, regardless of profit.

The Reasonable Compensation Question

If you're structured as an S-corp, this isn't just a philosophical exercise. The IRS requires you to pay yourself a "reasonable salary" before taking additional profit as distributions.

The temptation is to set your salary low to minimize payroll taxes and take more as distributions. But "reasonable" has teeth. If the IRS determines your salary is too low for the work you do, they can reclassify distributions as wages and hit you with back taxes, penalties, and interest.

The standard is: what would you have to pay someone with your skills and experience to do your job? That's the market rate we just talked about.

Talk to your tax preparer about what reasonable compensation looks like for your specific situation. But don't set your salary artificially low just to save on taxes. It's not worth the risk.

What About Profit?

After you've paid yourself a market-rate salary, what's left is profit. And profit belongs to you as the owner.

But not all profit should go in your pocket immediately. You need to think about:

Cash reserves. Is your operating reserve where it needs to be? If not, some profit should stay in the business to build that cushion.

Tax obligations. Profit means taxes. Are you setting aside enough for estimated payments? A good rule is to hold back 25-30% of profit for federal and state taxes.

Reinvestment. Does the business need capital for growth? Equipment, hiring, marketing? Sometimes the best return on profit is putting it back into the business.

What's left after reserves, taxes, and reinvestment is your distribution. Your return on ownership. Take it with a clear conscience — you earned it.

The Guilt Problem

Many business owners feel guilty about paying themselves. They worry about taking money out of the business. They feel like they should reinvest everything. They pay themselves last, after everyone else is taken care of.

This is backwards.

You are not a volunteer. The business exists to serve you, not the other way around. If the business can't afford to pay you a reasonable salary, that's a signal that something is wrong with the business model — pricing, costs, or capacity. The answer isn't to subsidize the business with unpaid labor. The answer is to fix the business.

Paying yourself first also forces financial discipline. When owner compensation is a fixed expense, you have to build a business that can support it. That's healthier than floating on whatever is left over.

A Simple Framework

Here's a practical approach to owner compensation:

1. Determine your market-rate salary. What would you pay someone to do your job? This is your baseline.

2. Pay yourself that salary consistently. Every pay period, like any employee. Not "when there's extra cash." As a fixed expense.

3. Build your reserves first. Before taking profit distributions, make sure your cash reserve is where it needs to be.

4. Set aside for taxes. Hold back 25-30% of profit for estimated tax payments.

5. Take quarterly distributions. What's left after reserves and taxes is yours. Take it quarterly so you're not leaving money sitting in the business unnecessarily.

This approach separates your compensation for work (salary) from your return on ownership (distributions) and makes both intentional rather than accidental.

When to Give Yourself a Raise

Review your compensation annually, just like you would for any employee. Ask:

→ Has the market rate for my role increased?

→ Has my role expanded?

→ Has the business grown enough to support a higher salary?

→ Am I still at market rate, or have I fallen behind?

If the business is profitable and growing, and your salary hasn't changed in years, you're probably underpaying yourself. Adjust accordingly.

Get Clear on Your Number

Owner compensation shouldn't be a mystery or a source of guilt. It should be intentional, based on real numbers, and structured in a way that serves both you and the business.

At Bottomline Capital, we help business owners think through questions like this. What's your market rate? What can the business afford? How should you structure salary vs. distributions? If you're not sure what you should be paying yourself, let's talk through it.

Book a free consultation and we'll figure out what makes sense for your situation.