How Much Should I Pay Myself From My Business?
Short Answer: Work backward from your life. Add up what your household needs each year after tax, including savings. Subtract any other household income. Gross the remainder up for income and self-employment tax to get your pre-tax owner pay. Then add what the business must keep for reserves and equipment, grossed up as well, since tax is due on every dollar of profit. That total is the profit your business has to make. If it makes less, you know the size of the gap before it turns into credit card debt.
Most owners set their pay one of two ways: a percentage of revenue they read somewhere, or whatever is left in the account at the end of the month. Both skip the question that matters, which is whether the business pays for the life you started it to fund. The method below answers that question first.
Step 1: What Does Your Household Need, After Tax?
Start with the annual spending your household actually has: housing, food, insurance, debt payments, kids, travel. Then add the saving you want to happen every year, such as retirement contributions or a college fund. Savings belong in the need, not in the leftovers, because leftovers rarely happen.
Use after-tax dollars here, since that's what you spend.
Step 2: Subtract Other Household Income
If a partner earns a salary, or you have rental or investment income, subtract its after-tax amount. What remains is the job the business has to do.
Step 3: Gross It Up for Taxes
As the owner of a sole proprietorship or single-member LLC, you pay two taxes on business profit:
- Self-employment tax: 15.3% (Social Security plus Medicare) on about 92% of your profit. An employee splits this with an employer. You pay both halves.
- Income tax: federal, and in most states, state income tax too. Your profit is taxed like wages, after deductions.
Two federal deductions soften this. Half of your self-employment tax is deductible. And most small-business owners get the qualified business income deduction, which lets you deduct up to 20% of your business profit from income tax (not from self-employment tax).
Step 4: Add What the Business Has to Keep
Profit that goes entirely to you leaves nothing for a truck that dies in July or a slow winter. Decide what the business keeps each year for equipment, a cash reserve and growth.
In a sole proprietorship or single-member LLC, the owner is taxed on all of the profit, including the part that stays in the business. So the amount the business keeps needs the same gross-up as your pay. Your profit target is the pre-tax profit that leaves enough after tax for both.
Step 5: Compare the Target With Your Actual Profit
If your current profit clears the target, you can pay yourself what the plan says. If it falls short, you now have a specific number to close, and you can see which lever closes it: prices, volume, costs, or the household number itself.
A Worked Example
Take the owner of a hypothetical landscaping company, Greenline Landscaping, which does about $520,000 a year in revenue. The owner files single, lives in a state with no income tax, and runs the company as a single-member LLC.
Steps 1 and 2. The household needs $6,000 a month after tax, including $500 a month into retirement. There's no other income. So the business has to deliver $72,000 a year to the owner's household after tax.
Step 3. To keep $72,000, the owner needs about $92,000 of pre-tax pay from the business under 2026 federal rules:
| Pre-tax owner pay | $92,000 |
|---|---|
| Self-employment tax | −$13,000 |
| Federal income tax (after the standard deduction and the 20% business income deduction) | −$6,900 |
| Kept by the household | about $72,100 |
About 22% goes to tax, and almost two thirds of that is self-employment tax, not income tax. A state income tax would raise the $92,000; a spouse with lower income, filing jointly, would usually lower it.
Step 4. The owner wants the company to keep $20,000 a year: $12,000 toward replacing a truck every few years and $8,000 to build a winter reserve. That makes $92,000 that has to be left after tax: $72,000 for the household and $20,000 for the business. The $92,000 in the table above assumed the business paid out all of its profit. Because the owner also owes tax on the $20,000 that stays, it has to be grossed up too:
| Profit before owner pay | $120,700 |
|---|---|
| Self-employment tax | −$17,050 |
| Federal income tax | −$11,620 |
| Left after tax | about $92,000 |
The profit target is about $120,700, about $8,700 more than adding $20,000 to the $92,000.
Step 5. Last year Greenline made $114,000 in profit before paying the owner, a 22% margin on $520,000. That falls about $6,700 short of the target. After about $26,600 of tax, the owner keeps roughly $87,400: the household's $72,000, and about $15,400 for the business instead of $20,000. The owner now knows that the next price increase or new maintenance contract has a concrete job to do: close that $6,700 gap before anything else.
Why the Usual Rules of Thumb Miss
A percentage of revenue ignores both sides of the calculation. Twenty percent of revenue is $104,000 at Greenline and $40,000 at a $200,000 business, and neither number knows what the owner's household costs.
Whatever's left at month end ties your pay to the timing of customer payments rather than to how the business performs. A busy month with slow payers looks like a bad month.
What Changes With an S-Corp?
If your LLC elects S-Corp taxation, you pay yourself a salary through payroll and take the rest as distributions. Self-employment tax applies only to the salary, which can save money once profit is high enough to cover the extra payroll and filing costs. The method stays the same: start from the household, gross up for tax, add what the business keeps. Only the tax math in Step 3 changes.
What to Look For
- Your tax set-aside against your real rate. Tax is due on all of your profit, not only on what you draw. If you set aside less than about 20% of profit, expect a bill in April you haven't saved for.
- The gap between actual profit and the target. Greenline is about $6,700 short of a $120,700 target, so the business keeps about $15,400 a year instead of $20,000. Even once the gap closes, a cushion under about 10% means one bad season forces a pay cut.
- Draws above the target. Pay beyond the plan comes out of the reserve, and the reserve is what gets you through winter.
What a Finance Consultant Would Do Next
A consultant working with Greenline's owner would move from the target to the levers: which price increase or contract mix closes the $6,700 gap, whether an S-Corp election pays off at $114,000 of profit, and what the target means for next year's plan.
That's the work Occam's Model does with your household and your books. It runs Steps 1 through 3 with your state and filing status, makes the result the target your business plan has to hit, and lets you test each lever before you pull it. When you need extra help, an expert can review it with you.
Common Questions
What percentage of profit should I pay myself?
There's no right percentage, because it depends on your household, not on the business. Work
out the dollar need first, then see what percentage of profit it turns out to be.
Should I pay myself if the business is barely profitable?
Pay yourself something steady, even if it's small, and track the gap to your target. Owners
who take nothing tend to lose sight of whether the business is working at all.
How much should I set aside for taxes?
In the example, about 22% to 24% of profit, and that includes profit left in the business,
which is taxed too. In a state with income tax, or at higher income, 25–35% is common. Set it aside every time you pay yourself, and pay quarterly estimates to the IRS.
Does this work if I'm not in business yet?
Yes. Run the same five steps before you quit your job, and the profit target becomes the
number your business plan has to reach.