How to Set Salary for Small Business Owners
Few topics stir up more emotion for small business owners humans than salary. Even though numbers technically have no emotion, this number feels deeply personal. Afterall, a salary for small business owners reflects the value of your time, your energy, and your immense financial and emotional responsibility. Yet on the other hand, your salary today impacts your company’s tomorrow: its ability to grow, sustain itself, and its future value.
Therein lies the tension and nuance for small business owners’ salary: money should be objective, but it never really is.
The Real Question Isn’t “What Can I Afford?”
When small business owners ask, “How much should I pay myself?” they’re often really asking, “What can the business afford?”
In fact, I hear many of our clients ask that very question to their bookkeepers: “What can the business afford to pay me?” Or “Can the business afford to give me a raise?”
It’s a logical place to start, but it’s the wrong question.
The better question is:
What do I want (need), and what’s the right number to pay myself today, to give runway for the business I’m building?
Think of it like a mortgage.
When you buy a home, you don’t just buy the biggest one your income qualifies you for. (Or: please don’t). You buy the home that you can safely afford – because you know it’s always going to cost more than the online calculator tells you.
So you buy the home that aligns with your broader goals: the life you want to live, the other things you want to afford, and the stability and peace of mind you want to maintain.
Your salary works the same way. It should fit both your life and the business you’re creating – not just what the bank or your bookkeeper says you “can afford.”
Step 1: Clarify What You’re Trying to Achieve
Before running the numbers, revisit your business path. And don’t worry: you don’t have to be 100% locked on one path. You’re allowed to change your mind. But having an idea of your north star will give you a focus to orient your decisions. It’ll remove some of the spin and analysis paralysis.
The type of business you’re building: Start-Up, Lifestyle, or Studio should guide how you think about your salary. Since we work with Solopreneur-Lifestyle & Studio Businesses, I’ll focus on those:
- (Solopreneur) Lifestyle: Your business exists primarily to fund your personal life. You’ll typically take a higher percentage of real revenue as owner salary.
- Studio: You’re balancing fair compensation with reinvestment. You want sustainable growth and may hold back cash to build reserves or fund team development.
Growth Is Essential for Creative Business Success. Growth requires fuel, and cash flow is that fuel. Tomorrow’s growth will be boosted – or hindered – by how much you spend today.
Step 2: Start with a Framework, like Profit First (but take it with a grain of salt)
If you like structure, the Profit First model offers a helpful starting point. It divides real revenue into clear buckets for profit, owner pay, taxes, and operating expenses.
Typical guidelines for small businesses (with revenue under $1M) might look like:
- Profit: 5%
- Owner Pay: 30–50%
- Taxes: 15%
- Operating Expenses: 30–50%
Don’t tell author Mike Michalowicz I said this, but I advise clients: use this as structure, not scripture.
For example, if you’re building a Studio-style business (in other words: a business to grow beyond you), restrict your owner salary as much as you can, and reallocate that money to operating expenses, whether you need them now or are using them for next year’s reinvestment. For our clients, investing in people is always the biggest move here.
Every business has unique cost structures, margins, and ambitions. The goal isn’t to copy someone else’s ratio; it’s to understand how each percentage interacts with your goals.
Step 3: Check the Math and the Meaning
Once you’ve sketched out your ideal targets, ask:
1. Does this number support my life?
You don’t have to take home every available dollar to feel successful. Sometimes paying yourself a little less now is what allows for greater financial and personal freedom later. AND: I don’t want to ignore realities.
Set your salary to the number you need to live (well). There will always be a creative tension between what you want now and what you want for the future. That’s natural and a sign that you’re tugging on the right strings. Personally, I’m the queen of delayed gratification. I think people would be shocked to know how little I lived on for most of my career to set myself up for a future life of abundance.
2. Am I leaving enough for the business to grow?
If your salary prevents you from investing in marketing, a team, or systems, you’re stalling your future for short-term comfort.
Think again about the mortgage metaphor. The mortgage number that the online calculator produces is never the full picture. There are tons of “phantom” costs to owning a home. The same is true for a business.
3. Does my salary number include taxes (mentally)?
In the Profit First framework we have a separate bucket for taxes, so if you use that as your structure, you shouldn’t be unpleasantly surprised from the IRS in April.
So, this is more of an emotional / psychological trick: when you think about your small business owner’s salary, include the tax in that overall number. The reason I say this is: if you were a W-2 employee, taxes would be included in your stated salary.
$100,000 on an employer’s offer = an estimated $70,000 owner salary. It may seem like a silly distinction, but as we said at the top of the article, emotions matter (a lot) when it comes to a small business owner’s salary.
A Final Thought
Money and emotion are forever intertwined. Pride, fear, guilt, and scarcity all make an appearance in this conversation. So acknowledge the emotion, then make your decisions with data.
As an owner, your pay isn’t a reward for showing up. It’s a reflection of your business’s design, your discipline as a leader, and the value you create directly and through others.
So the next time you revisit your salary, don’t just ask, “What can I take?” Ask, “What’s the number that sustains me and fuels the business I’m building?”
Ensure that your paycheck is a strategic tool, not just a personal one.
