Question: How should a small business owner decide how much to pay himself?

As a small business owner, I am looking for some advice on how much to pay myself.

Are there different ways that a business owner can pay himself? What are the pros and cons?

Expert Insight

If your business is very young, you may only be able pay yourself from net cash at the end of each month, much like a commissioned salesperson. As you grow, a great way to stabilize your income is to steadily increase your pay to the level of a comparable manager's salary and leave the remainder in the business.

Provided your business is generating enough cash flow, it may be helpful to reward yourself at the end of each quarter with a pre-determined bonus (10% to 20% of your salary) based on meeting or exceeding your financial objectives, just as you would a key manager - and the same at the end of the year. At year's end you will have a better sense of the value of owning (versus working in) your business if you have additional earnings to distribute to yourself and any other equity partners.

If your company was formed as a limited liability company and you have been filing federal taxes as a sole proprietor, you are likely paying more than 15% self-employment tax on your net income, in addition to federal withholding and income taxes. You may be able to eliminate the self-employment tax and reduce your 2016 tax bill by changing your tax filing status to a S Corp election.

For existing C Corporations and LLCs, you have until March 17, 2016 to take the S Corp election for 2016. New companies have 75 days from the date of their incorporation. To file, you’ll use IRS Form 2553. I recommend that you check with your CPA before taking this election to make sure you qualify and fully understand the limitations and consequences based on your unique circumstances.