When you are running a small business, it’s easy to put yourself at the bottom of the priority list as everyone and everything else seem to come first — vendors, employees, utilities, taxes, and more. But what does “Pay yourself last” actually mean? More to the point, is it always the right strategy? 

We’ll explore the origins of this concept, when it’s useful, and how to strike a healthy financial balance that supports your personal livelihood as well as your business. 

Understanding the Phrase ‘Pay Yourself Last’

At its core, “pay yourself last” suggests that only after covering all your business expenses should you take some money to pay yourself. 

This is rooted in conservative financial principles that are meant to protect the business’s stability. The idea is that by prioritizing overhead, payroll, and reinvestment, your company remains solvent, even if that means you are taking a smaller slice of the pie when all is said and done. 

While this practice may sound responsible, it can lead to challenges. For many small-business owners, it quickly develops into a habit of underpaying themselves, which is usually not a sustainable business strategy.

The Risks of Always Paying Yourself Last

Many entrepreneurs delay or skip personal compensation in order to funnel that money back into the company’s operations. While this may work in some circumstances, these factors greatly limit its effectiveness: 

  • Burnout: Constantly sacrificing your own paycheck can add significantly to your stress. 
  • Poor financial planning: Without a stable income, it can be hard to budget on a personal level. 
  • Lack of emergency savings: If your business hits a rough patch, you may not have a cushion to rely on.

Ultimately, the line between personal and business finances becomes blurry, especially for sole proprietors or freelancers, and that can make it difficult to assess how well either side is really doing. 

When Paying Yourself Last Makes Sense

 Despite the drawbacks, there are situations when this approach makes the most sense. For instance: 

  • Startups in their early phase: When profits are slim, it is often wise to ensure that essential expenses are being met first. 
  • Cash flow volatility: A business with irregular income may need to become stable before you begin drawing a salary. 
  • Debt obligations: If your business has debt, particularly high-interest debt, repaying that should probably take precedence over immediate compensation. 

However, this strategy should be temporary in most cases. If months or years pass and you are still unable to pay yourself on a regular basis, it is time to reassess your financial model and business as a whole. 

Why Paying Yourself First Might Be the Better Move

Some financial advisers advocate for the opposite mindset: Pay yourself first from the start. This doesn’t mean that you should neglect business expenses. It means treating your own income as a fixed cost. Here is why this can work: 

  • Incentivizes better budgeting: Many in this position who commit to a personal salary naturally find ways to cover other costs more efficiently. 
  • Builds personal stability: Consistent income supports your own savings, retirement contributions, and peace of mind. 
  • Clarifies business viability: If you cannot afford to pay yourself, the pricing and cost structure that you are using may need adjusting. 

Also, think of this as honoring your value. You are not just the owner. You are also an employee and, most likely, quite a hardworking one. 

How to Decide What to Pay Yourself

Determining your pay is not always straightforward. Factors to consider include: 

  • Business structure: Sole proprietors, LLCs, and corporations all handle owner compensation differently as far as tax purposes are concerned. 
  • Revenue consistency: Regular income allows for stable salaries while fluctuating revenue may require flexible payments. 
  • Industry standards: Research what people in similar roles in your field typically earn to set a realistic baseline for your own salary. 

A practice to consider is starting with a reasonable estimate and then reviewing and adjusting that amount on a quarterly basis, depending on your business’s performance in that time frame. 

Tools That Can Help You Stay on Track

Managing your compensation starts with clear, consistent records. Fortunately, time-tracking digital tools make that easier, helping ensure accurate billing, which is particularly important when hourly projects are being done. 

Understanding time card conversion can be especially useful as it translates employee hours into precise reimbursement. Calculating take-home pay after taxes and deductions is also critical. A reliable hourly payroll calculator can help you understand what you and your employees should be earning, based on hours worked and applicable tax rates. These tools streamline operations and help you make informed decisions about what is feasible when setting your own salary. 

Legal and Tax Considerations

Depending on your business type, how you pay yourself can have tax implications. For example, sole proprietors and single-member LLCs typically take owner’s draws, which are not taxed until profits are calculated. Meanwhile, S corporations require that owners pay themselves a “reasonable salary,” which is then subject to payroll taxes. 

Consulting a tax professional or an accountant is always a smart move. Also, the U.S. Small Business Administration offers guidance on this topic, and so does the IRS’ Self-Employed Individuals Tax Center. 

Putting Yourself on the Payroll Isn’t Selfish — It’s Smart

It’s easy to believe that self-sacrifice is a part of entrepreneurship. And in the beginning, it often is. But consistently putting yourself last can lead to long-term financial and emotional strain. That is because paying yourself a fair amount on a regular basis is not just about money. It’s also about sustainability. 

Taking care of your own financial well-being sends a strong signal that your work has value, and your business is healthy enough to support one of its most important assets: you.

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