Figuring out how to pay yourself is one of the biggest challenges small business owners face.
You deserve to be paid well for the time and energy you invest, especially when nearly three-quarters of owners work longer than the 39-hour median week. But it’s not always simple.
You may be juggling inconsistent income and facing cash flow uncertainty, so figuring out how and when to pay yourself without harming the business can be a practical challenge.
There’s no one-size-fits-all answer. The right way depends on your business structure, performance and long-term goals.
Understanding your options early can help you avoid common pitfalls, stay compliant with the Australian Taxation Office (ATO), and make decisions that support both your personal finances and your business’s future.
How your business structure affects your pay
Different business structures come with different rules and practical steps when it comes to paying yourself. Understanding how your pay affects your personal tax return, along with managing tax obligations and compliance, helps you get the most from your hard work.
Sole traders and partnerships
If you’re operating as a sole trader, you don’t pay yourself a wage. Instead, you draw money from the business as needed.
Those drawings aren’t considered a business expense. You’re taxed on the full net profit of the business, whether or not you withdraw it. This means your personal tax is based on the business’s performance, not how much cash you take out.
As a partner in a business, you generally won’t receive a wage. Instead, the partnership’s net profit is split according to your partnership agreement, and you’re taxed on your share, even if you haven’t actually taken the money out.
In both structures, strong record-keeping is essential. Tracking income, expenses, and drawings helps ensure you meet your tax obligations, manage PAYG instalments, and maintain healthy cash flow throughout the year.
Company directors
If your business is set up as a company, you can employ yourself and pay a salary through payroll, just like any other employee. This means tax withholding and super contributions will apply.
Your company’s net profits are taxed at the company level. After tax, any remaining profits can be distributed to shareholders as dividends, which are taxed differently from salary.
This structure provides tax planning flexibility but also comes with extra compliance responsibilities. It’s important to keep accurate records to calculate your taxable income correctly, manage your pay as you go (PAYG) instalments, and maintain sufficient cash flow to cover business expenses, tax payments, super and dividends throughout the year.
Trust beneficiaries
If your business operates through a trust, you can pay yourself in several ways:
- By employing yourself and receiving a wage
- By taking drawings from the trust’s profits
- Or a combination of both
Trusts offer flexibility and potential tax advantages by allowing income to be distributed among beneficiaries in a way that minimises tax. However, it’s important to consider how profits are allocated and the tax implications for each beneficiary.
Importantly, there’s no tax withholding or credits on drawings from trust profits, so you’ll need to plan ahead to cover the tax payable on any distributions you receive.
Maintaining an up-to-date trust deed and documenting distribution decisions annually is essential. Because trusts have specific rules and complexities, we recommend seeking professional advice to help you manage your trust structure effectively and stay compliant.
Related: The big question: how can I reduce my tax?
How much to pay yourself
Ideally, you want to pay yourself a commercially reasonable wage for the role you perform in the business. This can be tricky in small businesses where you often juggle multiple roles.
Start by considering how much you need to draw to support your lifestyle. But also ask yourself: “Can my business afford this?” If you’re unsure, financial projections can help you find the right balance.
Keep in mind, in many small businesses, the owner is often the last to be paid. So, careful planning is essential to avoid cash flow issues.
Related: Financial projections 101: profit and cash flow
Balancing business needs with income
The general rule is to pay yourself enough while leaving enough funds in the business to cover:
- Business expenses – Rent, utilities, supplier payments, wages for any staff, and other ongoing costs that keep your business running smoothly, aka operating costs.
- Rainy day funds – A financial buffer or emergency fund to help your business weather unexpected challenges or slow periods without risking cash flow
- Reinvestment – Money set aside to invest back into the business for growth. This could be equipment, marketing or expanding your product or service offerings.
Related: Wage setting: working out salary levels for your business
At the same time, you need to ensure your personal finances are covered by considering your household budget needs, including:
- Day-to-day living expenses – Groceries, transport, utilities, school fees, and other regular costs that keep your household running.
- Mortgage and loan repayments – Ongoing payments for your home, car or other personal loans that require steady income.
- Insurance payments – Health, life, income protection, and other insurance premiums to protect yourself and your family financially.
- Retirement planning – Contributions to your super or other retirement savings to secure your financial future beyond the business.
Let’s look at some benchmarks
According to the Australian Small and Family Business Ombudsman, 75% of small business owners earned less than the average Australian wage in 2023.
Reported incomes shown in the report range from $26,000 to $208,000 a year (roughly $500 to $4,000 a week), but this can vary significantly depending on your industry, business model and overall profitability.
In the early stages of business, it’s common for owners to take a modest salary while prioritising reinvestment into growth.
As the business becomes more established and profitable, we often see owners increase their pay, sometimes significantly, depending on the size, performance, and financial goals of the business.
Steady pay with added bonuses
Regardless of how much you pay yourself, consistency matters. Paying yourself regularly helps create stability in your business cash flow and personal finances. And it keeps both sides of your life running smoothly.
And if cash reserves build up over time, there’s no harm in rewarding yourself with a bonus. Just make sure it fits within your broader financial plan.
Importantly, make sure you keep a separate business bank account and personal account and use the latter to receive your pay.
Need help deciding how to pay yourself? Get in touch with your Maxim advisor or contact our team today. We’ll walk you through your options and help you choose an approach that fits your business.
