What Should You Pay Yourself?
If your business is incorporated, how much salary should you take for yourself? There's no magic formula that you can use in making this decision. You must weigh many factors, including:
How much the business can afford. Compensation is always a factor of cash flow--you need the funds to be able to meet payroll each pay period and cover your other business expenses. In setting compensation, be sure to factor in ancillary costs, such as employment taxes the corporation owes on the payments and any insurance tied to compensation.
The impact of your pay on the compensation of others in your business. If there are other owners and/or family members working for the corporation, what you pay yourself can affect the pay to others. Using an objective standard for setting compensation, such as a set amount for certain job responsibilities, can avoid disharmony.
Tax considerations. The corporation can only deduct "reasonable compensation." What is considered reasonable usually depends on what a hypothetical investor would pay to you for the work you do after receiving a return on his or her money.
Best strategy: Decide what you would pay to a third party performing your job (i.e., what the market demands and the company can afford) and fix your payment accordingly.
If you business is unincorporated, your draw can be whatever the business can afford. While your draw may look similar to corporate salary, it is quite different: self-employment tax is not dependent on the draw (it's generally fixed on your share of business income) and, since the business cannot deduct the draw, it is not governed by any reasonableness limitation.
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