Am I Paying Myself Too Little, or Too Much?

Most owners set their own pay the way they set the thermostat: once, by feel, and then they stop thinking about it. You take what the business can spare this month, or what covers the bills at home, and you rarely ask whether the number is right.

That habit is expensive. Your salary shapes your cash flow, your tax bill, and the price a buyer will eventually pay for the company. Set it too low or too high and the business looks different on paper than it really is.

Here is how to find out where you stand, and what to do about it.

1. Price the Job You Actually Do

Start with one question: if you stopped doing your job tomorrow, what would it cost to replace you? Be honest about the work. An owner who sells, approves every bill, and manages the team is doing the work of two or three people.

• Write down what you actually do each week, not the title on your business card.

• Pull current pay data for comparable roles in your market, including benefits and payroll taxes.

• Compare that replacement cost to everything you take out of the business: salary plus distributions.

If you take far more than the job is worth, the business is paying for your lifestyle. If you take far less, the business is quietly subsidizing you, and you are working for free.

Run this exercise every year. Your role changes as the business grows, and the replacement cost changes with it. An owner who runs sales, operations, and finance at a $1 million company may need a sales leader, a controller, and an operations manager by the time revenue reaches $5 million. Your pay should reflect the job you actually perform at that size, not the job you did when you started.

2. Understand How a Buyer Reads Your Number

A buyer never takes your reported profit at face value. They rebuild it, and owner pay is usually the first line they change.

• If you are overpaid, the buyer subtracts the excess. Earnings fall, and so does the value.

• If you are underpaid, the buyer adds the shortfall back. Earnings rise, and so does the value.

• Small-business deals often use seller’s discretionary earnings, which adds back your full pay. Larger deals usually use EBITDA, which adds back only the amount above a market-rate replacement. Know which one your buyer will use.

Here is the math. A business pays its owner $500,000 for a role the market prices at $250,000. The buyer adds back $250,000. At a 5x multiple, that adds $1.25 million to the price. The reverse holds too. An owner paid $250,000 below market can see that gap added back, lifting the price by the same amount.

The gap is not trivial. In one deal advisor’s published benchmarks, owner pay adjustments typically move reported EBITDA by 5% to 15%. Those adjustments land directly in the valuation.

3. Respect the Tax Rules Before You Change the Mix

Salary and distributions are taxed differently, and tax authorities watch the split closely. In the United States, an S corporation shareholder who works in the business is generally treated as an employee. The IRS expects reasonable compensation paid as wages before non-wage distributions. The rules differ by country and entity type, so confirm the specifics with your tax advisor before you move any money.

• Officers who perform substantial services are generally employees, and their pay should match the work.

• The pattern that draws scrutiny is low salary paired with large distributions.

• If the IRS finds pay unreasonable, it can recharacterize distributions as wages and assess back payroll taxes, penalties, and interest.

• Keep a file showing how you set your pay: your role, your hours, and comparable compensation.

4. Avoid the Two Common Traps

Most owners land in one of two places, and both cost money.

• The Underpaid Founder. You take little salary to make profit look strong. Your personal income stays thin, your work goes undervalued, and your tax exposure grows.

• The Overpaid Owner. You pull more cash than the business can sustain. Reserves shrink, reinvestment stalls, and the company depends on your withdrawals to stay healthy.

Personal expenses run through the business belong in their own category. Track them separately, with receipts. Buyers will adjust for them, and the IRS will ask about them.

5. Build a Pay Plan You Can Defend

• Set base salary from your replacement-cost analysis, and review it once a year.

• Define how distributions are decided: a fixed share of profit, a set quarterly amount, or only after reserves are funded.

• Keep a simple schedule of owner pay and personal expenses, backed by documentation. Buyers ask for it early.

• Review the whole plan before any sale process begins, not during one.

Writing this down takes an afternoon. It saves months of cleanup when a buyer or lender asks how your numbers were set. Share the final version with your accountant and your CFO so everyone is working from the same figures.

Final Thoughts

Your pay is not a leftover. It is a business decision with a price tag, and someone will eventually price it for you, whether you planned for that or not. Set it on purpose now, while you still control the numbers.

Pay yourself on purpose, or a buyer will do the math for you.

Ready to see where your pay really stands? Book a discovery call and we will run the numbers together.