When to start paying yourself from your business

Key points

• Paying yourself can support and protect your personal finances and financial wellbeing
• The ideal time to pay yourself is when you make a reasonable profit
• How you pay yourself depends on if you’re a sole trader or company owner
• Consider your business needs, tax and super when working out how much to pay yourself

When starting a small business, most owners forget about one important person – themselves. It can be difficult to balance paying yourself with what’s best for the business. But neglecting to pay yourself can have a lasting effect on your finances, both personal and business.

So that’s why we're going to explain what you need to know about paying yourself – from how much to why you should be doing it when you can.

Why is paying yourself important?

Paying yourself can help protect your personal finances and support your financial wellbeing – ensuring your bills and necessary expenses are covered. By prioritising your own salary and paying yourself first, you can start saving comfortably or invest that money elsewhere (or do both).

Another reason you should pay yourself is that you’re increasing your financial security. When you have some rainy-day cash in your back pocket, you might feel more confident to grow your business or take a risk. This additional cash can also be good for when the business is running at snail’s pace and you’re earning less income. Or it can come in handy if you experience a personal emergency.

When is a good time to start having your own salary?

No two businesses are the same, so there’s no set rule for when business owners should start paying themselves.

When your business starts making a reasonable profit is a good indicator that you can start paying yourself a salary. For example, you might start earning a salary from the business after a few months of being open and making a steady profit. But for some businesses, it’s not always that easy – it might take an entire year or longer before your business finances are in the green.

A cashflow analysis is also required to work out if the business is in a position to afford to pay you a salary.

How do you pay yourself?

There are different ways you can pay yourself, but it comes down to whether you’re a sole trader or a company owner.

Paying yourself as a sole trader

Being a sole trader equals being the entire business. This means you’ll be withdrawing cash from your business to pay yourself. These withdrawals are considered an advance of the anticipated profit from the business for the year. At the end of the year, if the business returns an overall profit, these advances are included in your own individual tax return as business income and taxed at your marginal tax rate.

If you’re a sole trader, it’s a good idea to set aside some of your pay throughout the financial year. This will help you get ready for tax time when it comes around.

Paying yourself as a company owner

If you are operating a business through a company structure, then having an annual salary is a common payment strategy. This works the same way as if you were working a regular job – it’ll show up in your individual tax return as salary income and you'll pay income tax at your marginal rate.

Most business owners in this position will take a modest salary and top it up with some of the business’ profits (which normally takes the form of a dividend paid from the profits of the company to the shareholders). As a starting point, do some research on salary search websites, such as Seek, to work out what a business owner in your industry is earning, but focus on what is needed for you and your company.

How much should you pay yourself?

While you can pay yourself as much or as little as you like, there are some things you should consider to help decide the amount you can pay yourself.

Business needs

The needs of your business will influence what you can reasonably pay yourself. This includes any expenses your business has to pay for growth or improvement, like developing a new product or hiring staff. Having a robust business plan that maps out your business’ growth can help you work out how much money you need to make it happen (and how much you pay yourself too).

Tax

As alluded to above, the tax implications of withdrawing money from the business will vary depending on the type of business structure you are utilising.  Paying yourself a salary may also trigger additional tax compliance obligations you need to meet.  We recommend that you discuss your own specific circumstances with your tax agent so that you fully understand these.

Super

In a typical workplace, some of your pay would go towards your nominated superannuation fund. And when running your own business, this is something you can consider doing for yourself too. Paying some of your salary into your super can set up for retirement later in life.

Next steps

Working out your cash flow can help you see if you’ve made enough money to cover your business expenses – including paying your own salary. If you want to get started, then download the ANZ cash flow forecast template today.