What should I pay myself?

gcpa on November 18, 2025

What should I pay myself? A practical guide for small business owners.

One of the most common (and surprisingly complicated) questions business owners ask is “What should I pay myself?”.

As an entrepreneur, you’re not just the boss, you’re also an employee, strategist, investor, and sometimes the janitor. With so many hats, figuring out what to pay yourself can feel unclear or even indulgent. But paying yourself fairly is not only necessary, it’s also a smart financial and tax strategy…. not to mention a requirement by the IRS!

Many owners—especially those in early growth phases—put all profits back into the business. While that may help with growth, not paying yourself long-term isn’t sustainable.

Paying yourself has many benefits. It helps protect personal finances – you need to pay your own bills and plan for your future, set boundaries – separating personal income from business cash flow (which is important for legal protection), create consistency – helping with budgeting, taxes, and business forecasting and most importantly, establishing value – you are performing real work and deserve to be compensated for it!

Your business structure plays a big role in how and how much you pay yourself.

  • Sole Proprietors & Single-Member LLCs
    You take an owner’s draw (withdrawals) from the business profits. There’s no set “salary,” but you should regularly review profits and allocate a consistent amount. All profits are taxed as personal income, and you pay self-employment tax (Social Security & Medicare) on the net earnings, not on the draw itself.
  • Partnerships & Multi-Member LLCs
    You may receive guaranteed payments and/or take distributions, depending on the partnership agreement. You’ll report your share of profits on your personal tax return and pay self-employment taxes. Like owner’s draw, guaranteed payments should be planned and consistent and do not attract Social Security and Medicare on payment.
  • C Corporations
    Owners must be on payroll and paid a salary. Wages are subject to employment taxes, and dividends (if distributed) are taxed again at the personal level—this is the classic “double taxation” structure.
  • S-Corporations
    This is where the “what should I pay myself” question becomes more than just financial—it’s also a compliance issue. As an S-Corp shareholder who actively works and contributes to the business, you are required to pay yourself a reasonable compensation via W-2 wages before taking any non-wage distributions.

So, what is reasonable compensation?

According to the IRS, “The fair market value of economic benefits received for the performance of services is reasonable compensation, which is the value that would ordinarily be paid for like services by a like enterprise under like circumstances”.

In layman’s terms, what the IRS is saying is that you must pay yourself a similar amount that you would pay someone (not you) to do the same service that you are currently performing in your company. If you need to take emergency leave and must find someone to replace you in the company, how much would hiring such a person cost?

The IRS has acted against S-Corp owners who underpay themselves and if audited, the IRS can reclassify distributions as wages—leading to back payroll taxes, penalties and interest and increased scrutiny. Cases like David E. Watson, P.C. v. U.S. demonstrate that the IRS doesn’t take this lightly.

So how do you decide what to pay yourself?

Firstly, let’s start with your role in the company. What are all the roles that you have in the business?
Secondly, if you must hire someone to fulfil your position, what would it cost? You should use market data and document your sources. You can also do a Reasonable Compensation analysis with a reputable firm.

Thirdly, consider where your business is in its stage of life and what it can afford. While the reasonable compensation analysis might provide a fair market value figure, it does not necessarily mean that that is what your company can afford. The salary chosen must be reasonable but also sustainable for the business. A review of your profits and cash flow would assist in determining what the company can reasonably sustain.

Once you have determined your reasonable salary amount, start paying yourself a Salary! Periodic reviews should be set up so that your compensation can evolve as your business is evolving.

Many business owners struggle with this topic. The reason many of you got into business was for some level of financial freedom but how can you have that if you are not paying yourself!

You are your business’s most valuable player, take care of the business and let the business take care of you. Paying yourself is not selfish, it does not make you a bad person… on the contrary it means that you value yourself and the effort that you put into the business. Paying yourself is strategic. It should give you clarity and confidence in yourself and your abilities while helping you be compliant with the IRS. In the long term, it helps you build a stronger, healthier business.

The Pros and Cons of Factoring

gcpa on November 18, 2025

So, you’re wondering whether factoring might be a smart move for your business? But first—what exactly is factoring?

Factoring is a type of financing where a business sells its accounts receivable (invoices) to a third party—known as a factor—in exchange for immediate cash. The factor pays you the invoice amount minus a fee or commission, helping you improve short-term liquidity. It is a way to get cash that is already owed to you, without waiting 30, 60 or even 90 days to get paid.

When Should You Consider Factoring?

If your business is growing fast, or if you are dealing with long payment cycles, factoring can help you stay ahead. Factoring helps you access the money tied up in unpaid invoices so you can move quickly. Even if you are not in a high-growth mode, it can be useful especially in cases when you don’t always have the luxury of waiting on clients to pay on their own schedule.

Is Factoring an Asset or Liability?

Here is the good news: factoring is not debt. You are not borrowing money; you are just transferring ownership of your receivables. Since you are not taking on a loan, factored invoices do not count as a liability—making this a clean funding option, especially for newer or scaling businesses.

More good news: Factoring fees are also tax-deductible. They are treated as business expenses, which means they reduce your taxable income. Just keep in mind: if your business retains ownership of the receivables and only gets an advance, that advance typically isn’t considered taxable income.

What Are the Downsides?

Factoring can be a great tool—but it is not free. Because you are receiving less than the full invoice value, your profit margin takes a hit. Factor fees generally range from 1% to 5% of the invoice amount, often charged on a recurring basis until your customer pays in full.

Also, not all invoices may qualify. Factors usually assess your customer’s creditworthiness – not yours. If your clients have a poor payment history, you might have to pay higher fees or worse rejection.

What Are the Key Terms to Look Out For?

Before entering into a factoring agreement, it’s crucial to understand the terms involved. Here’s what to watch for:

  • Advance Rate – The percentage of the invoice the factoring company pays you upfront, usually between 70% and 90%, depending on risk.
  • Factoring Fee – The cost for accessing immediate funds. It is a percentage of the invoice and may be charged one time or monthly until the customer pays.
  • Recourse vs. Non-Recourse – This determines who bears the risk if a customer does not pay. With recourse, your business is on the hook for unpaid invoices. With non-recourse, the factor takes the loss—but typically charges more.
  • Termination Clause – Explains how either party can end the agreement. Pay attention to notice periods, early exit fees, and auto renewals.
  • Default and Remedies – Outlines what happens if a party fails to meet its obligations. Remedies may include late fees, legal action, or changes in terms.
  • Collateral – Your accounts receivable function as collateral in the arrangement. Make sure the agreement clearly states which invoices are included.
  • Representations and Warranties – These are formal statements made by each party. If they turn out to be untrue, legal consequences may follow. A false representation is “inaccurate;” a false warranty is “breached.

So—Is It a Good Idea?

Factoring can be an excellent option for businesses in high-growth mode. It scales with your operations—if your customers have solid credit—and gives you the flexibility to reinvest in your business without waiting for slow payments. Just weigh the cost and review the terms carefully before signing on the dotted line.

Final Thoughts

Now that you have a solid understanding of what factoring is all about, you are in a better position to decide whether it is the right fit for your business. It’s not a one-size-fits-all solution, but when used strategically, factoring can be a smart way to manage cash flow. It gives you fast access to working capital—without the hurdles of traditional loans. That said, not all factoring agreements are created equal. The key is to know what you are signing. Pay close attention to fees, risk exposure, and contract terms. With the right setup, factoring can give your business the flexibility and speed it needs to grow.