How to Pay Yourself as an Entrepreneur: Finding the Right Approach for Your Business
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In this episode of QuickBooks Mastery for Small Business Success, Erica Northrup and Lee Davis tackle a question many business owners wrestle with: how do you pay yourself as an entrepreneur?
It sounds simple, but the reality is more complex. How you pay yourself affects not only your personal income—but also your taxes, business structure, and long-term financial strategy.
Start With the Basics: What Do You Need?
Before deciding how to pay yourself, start with two key questions:
- What are your personal monthly expenses?
- What can your business realistically support?
Your compensation should strike a balance between your personal financial needs and the sustainability of your business.
It’s also important to recognize that this decision has tax implications, so it should never be made in isolation.
The Three Main Ways to Pay Yourself
Erica and Lee outline three common methods business owners use:
Owner’s Draw
This is the most common approach for LLCs.
- You take money out of the business as needed
- You’re paid from what’s left after expenses
- Taxes are still owed, even though it’s not traditional “income”
This method offers flexibility, but it requires discipline and planning—especially when it comes to taxes.
Salary
If your business is structured as an S-Corporation, you may be required to take a reasonable salary.
- Processed through payroll
- Subject to payroll taxes
- Provides more structure and consistency
Distributions or Dividends
If your business generates strong profits or you have additional income sources, distributions may come into play.
- Typically used alongside a salary in S-Corps
- Can offer tax advantages depending on your situation
How Business Structure Influences Your Decision
Your entity type plays a major role in how you pay yourself:
- $200,000–$300,000 revenue → Often structured as an LLC, using owner’s draws
- $1M–$2M+ revenue → Often structured as an S-Corp, combining salary and distributions
These aren’t strict rules, but they provide a general framework for thinking about your options.
Using QuickBooks to Guide the Decision
One of the most valuable tools in this process is your Profit & Loss statement in QuickBooks.
This report helps you:
- Understand your true profitability
- Evaluate how much your business can sustain
- Make more informed compensation decisions
Without clear financial data, it’s easy to overpay—or underpay—yourself.
What If You Feel Underpaid?
Many business owners reach a point where it feels like their employees are making more than they are.
If that happens, step back and look at the bigger picture:
- Are you building equity in the business?
- Are there tax advantages you’re benefiting from?
- Is the business reinvesting in growth?
Compensation isn’t always just about your paycheck—it’s about total financial benefit.
Additional Considerations
There are a few other important factors to think through:
- Retirement contributions (like a 401(k))
If your business isn’t funding it, it may not be happening - Insurance coverage
- Dental insurance is typically fully deductible
- Health insurance can be significantly more expensive
- Timing of payments
There’s no one-size-fits-all answer—it depends on your cash flow and personal needs
Common Mistakes to Avoid
Even experienced business owners can make costly missteps:
- Paying yourself through payroll when it’s not appropriate
- Assuming your pay is automatically tax-deductible
- Not fully understanding what can and cannot be deducted
- Running payroll yourself and failing to pay payroll taxes
These mistakes can lead to compliance issues and unexpected tax liabilities.
Final Thoughts
Managing your business finances effectively isn’t about perfection—it’s about consistency and clarity. The more you understand your numbers, the better equipped you are to make confident, strategic decisions.
As emphasized in this episode, the right systems—and the right support—can make all the difference in building a sustainable, successful business.
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