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Wondering how to pay yourself as a business owner?
Many small business owners ask this, and it’s really important.
I’ve sat with countless Australian entrepreneurs who’ve either overtaxed themselves by taking too little from their business or jeopardised their company’s future by withdrawing too much. The difference between struggling and thriving often comes down to implementing the right payment structure at the right time.
As you read this article, I will guide you through the various approaches, from setting your wage to managing your tax responsibilities.
Understanding the Basics
Two Business Structure Options Available
When you’re starting your business journey, you’ll typically choose one of these business structures: sole trader or company. In addition to paperwork and tax returns, this choice affects the flow of money between your business and your personal account.
As a sole trader, you and your business are essentially one and the same in the eyes of the tax office. Your business earnings flow directly into your personal income. It’s straightforward but comes with its own set of considerations.
You create a separate legal entity when you operate as a company. Your business stands on its own, with its own financial identity. As far as paying yourself goes, this separation offers both protection and complications.
Paying Yourself as a Sole Trader
How Your Money Works
As a sole trader, you and your business are one and the same. Any profits that your business makes are considered your personal income, whether you withdraw them or leave them in your business account.
Simply put: You are the business. There’s no separation between you and your earnings, which means you pay tax on the total profit made by the business.
Best Practices:
One of the biggest mistakes I see sole traders make is failing to prepare for their tax obligations. Since you pay tax on all business profits through your personal tax return, you need a solid plan for setting money aside.
Here’s what I recommend to all my sole trader clients:
- Create a separate account specifically for tax funds
- Transfer a percentage of each payment you receive into this account
- Aim for 25-30% of your income, depending on your tax bracket
- Consider this money untouchable until tax time
Superannuation: Don’t Shortchange Your Future Self
Retirement can seem like a distant concern when you’re busy building a business. But as a sole trader, you don’t have an employer making those superannuation contributions for you. It’s entirely up to you to prepare for your future.
💡 Quick Tip: Currently, you can contribute up to $30,000 annually to your super as a concessional (tax-deductible) contribution. Every dollar reduces your taxable income while building your retirement nest egg.
When to Consider Transitioning to a Company
Through years of advising business owners, I’ve found that there is often a tipping point at which converting to a company structure makes financial sense.
Income Threshold to Watch:
A good rule of thumb is to consider incorporating when your taxable income consistently reaches around $180,000. Here’s why:
- As a sole trader, you pay tax at marginal rates that increase as your income goes up, reaching up to 47%.
- Companies, on the other hand, pay a flat 25% tax rate on all taxable income.
If your income is consistently around $180,000 or more, you could be paying significantly more tax as a sole trader than you would as a company.
Key Considerations:
- Income Consistency: It’s important that your income is steady, not just a one-off good year.
- Professional Advice: Transitioning to a company has legal and tax implications. It’s always a good idea to chat with your accountant to see if it’s the right move for you.
⚠️ Important Note: Don’t rush to convert based on a single good year. The process involves costs and ongoing obligations that only make sense if your income consistently justifies the switch. I generally recommend seeing at least two consecutive years at that higher income level before making the leap.
Your Payment Options as a Company Owner
Two Ways to Pay Yourself
Once you’re operating as a company, the relationship between you and your business changes fundamentally. Now, you need a formal mechanism to move money from the company to your personal accounts. There are two main approaches:
Option 1: Wages
- Regular, predictable income
- The company pays your superannuation
- Tax is withheld just like any employee
- Counts as a business expense for the company
Option 2: Dividends
- Distribution of company profits
- Come with franking credits
- Not a deductible expense for the company
- Can be more tax-effective depending on your situation
How Much Should You Pay Yourself?
Setting a Wage:
The best approach is to work backwards:
- What do you need to live comfortably?
- What are your personal financial goals?
- How much can the business afford to pay you?
I recommend setting your wage somewhere between $100,000 to $120,000 per year, but this depends on your lifestyle and how well your business is doing.
Budgeting and Financial Planning:
- Make sure your business can consistently cover your wage.
- Regularly review and adjust based on how your business is performing.
Pro Tip: Start with a conservative salary. It’s always easier to increase your wage as the business grows than to cut back if times get tough.
When Business Isn’t Booming
What happens if your business hits a rough patch?
Many business owners make critical errors in their payment strategy at this point.
Some stop paying themselves entirely to “save the business,” but this often leads to personal financial stress that ultimately harms the business. Others maintain an unsustainable salary that drains the business of needed resources.
A better approach is to establish a base salary that your business can support even during slower periods, then supplement it with additional payments (whether higher wages or dividends) during more profitable times. The result is a sense of stability both personally and professionally.
Smart Money Management for Business Owners
Successful business owners develop habits that protect both their business and personal finances. Here are my top recommendations based on years of working with thriving entrepreneurs:
- Maintain separate accounts for business operations, tax obligations, and personal expenses
- Set a regular review schedule to examine your business finances (monthly is ideal)
- Build a business emergency fund before substantially increasing your personal income
- Work with a professional to optimise your tax position quarterly, not just at tax time
Tax Planning Throughout the Year
Tax planning isn’t a once-a-year activity – it’s an ongoing process. For sole traders, this means consistently setting aside funds for tax. For company owners, it means carefully timing dividend distributions and planning superannuation contributions.
I recommend quarterly sessions with your accountant to review your tax position and make adjustments if needed. This proactive approach often identifies opportunities for tax savings that would be missed with only an annual review.
🌟Need help getting started?
Download your Free Tax Planning Guide to help you stay on track throughout the year. It’s packed with practical tips and checklists you can easily follow.
Want Personalised Business Advice?
Every business has its unique fingerprint – a combination of industry, size, growth phase, and your personal financial goals. What works brilliantly for one business owner might be completely wrong for another.
If you’re feeling uncertain about the best way to pay yourself, or if you’re wondering whether your current approach is optimal, let’s talk.
Paying yourself isn’t just about taking money out of the business but building a secure financial future.
