One of the most overlooked financial practices among small business owners is paying themselves a market-based wage. Too often, entrepreneurs rely on sporadic owner draws or distributions when there’s “extra cash”—but that approach can stunt growth, create cash flow chaos, and leave your financials in disarray.
As a virtual bookkeeper, I see this all the time. Owners confuse business profits with personal income, blurring the lines between what the business earns and what they’re actually paying themselves. That’s a problem—for several reasons.
1. You’re an Employee Too (Whether You Like It or Not)
Even if you own 100% of your business, you still perform valuable work—sales, project management, customer service, operations, strategy. If you had to hire someone else to do what you do, what would you pay them? That number is your market-based wage. It reflects the true cost of operating your business and allows you to price your services and plan your finances realistically.
2. Clearer Financials = Smarter Decisions
Paying yourself a consistent, reasonable salary helps you see what your business actually earns. It forces a separation between profit (what your business produces after compensating labor) and income (what you personally take home). This clarity is essential when forecasting cash flow, applying for loans, or preparing for growth.
3. Builds Credibility and Stability
Regular, documented wages help when applying for mortgages, refinancing debt, or attracting investors. It shows your business is stable, legitimate, and run like a real company—not a hobby. It also reduces the risk of IRS scrutiny if you’re an S-Corp owner. The IRS expects you to take a “reasonable compensation” before taking distributions.
4. Helps You Plan for Your Own Life
Let’s be honest—your mortgage lender, grocery store, and retirement account don’t care whether your business had a good quarter. They care whether you got paid. A steady wage helps you budget, save, and invest in your personal life with confidence.
Start by identifying what someone in your role would earn in the open market, then set that as your goal. Whether you run payroll or make regular draws, do it with intention—not whenever the checking account looks flush.
Want help determining your market-based wage or implementing a payroll system? Let’s talk—I’d love to help you treat your business like the asset it is.