Setting Your Entrepreneurial Salary

Deciding how much to pay yourself is one of the trickier questions facing business owners.

Grow Your Business, Not Your Inbox

Stay informed and join our daily newsletter now!
2 min read
Opinions expressed by Entrepreneur contributors are their own.

Q:How much should I pay myself?

A: This is a particularly tricky question. As a sole proprietor, it's your choice how much to pay yourself, and it can be tempting to pay yourself too much, especially if you're living hand-to-mouth while waiting for the business to grow.

A good rule of thumb is to pay your business costs before you pay yourself. Estimate the minimum dollar amount your company will reliably generate every month in terms of steady business, and then deduct your monthly overhead (electricity, office supplies, rent, payments to suppliers and so on). These costs must be paid before you get paid, unfortunately. Smart entrepreneurs also set a small portion of their income aside every month for annual taxes (estimating the amount is where an accountant comes in handy). The net amount left over is your monthly take-home pay.

For the first year, it's better to err on the side of caution and pay yourself less instead of more until you get a feel for your overall expenses, including surprise costs such as local business taxes and equipment purchases. As your business settles in, you can set up a 401(k) or SEP-IRA that deducts a specific amount from your business account once a month. If you already have one going, you can increase the amount that's deducted each month.

Another tip: Set up a separate checking account to keep the company's money separate from your personal money. This way you can accurately track how much you've paid yourself come tax time, and it's something the IRS likes to see.

More Solutions

More from Entrepreneur

Learn how to get your own business launched with our on-demand start-up course. Whether your ready or just thinking about starting your own business, get started for free with our first 3 lessons and receive a personalized 1-page business brief.
Jumpstart Your Business. Entrepreneur Insider is your all-access pass to the skills, experts, and network you need to get your business off the ground—or take it to the next level.
Entrepreneur Store scours the web for the newest software, gadgets & web services. Explore our giveaways, bundles, "Pay What You Want" deals & more.

Latest on Entrepreneur