Why Business Owners Should Pay Themselves Properly
There’s a conversation that comes up again and again with business owners, and it goes something like this: someone is running a company turning over a couple of million dollars a year, and they’re paying themselves $100,000 AUD. Their family needs closer to $150,000 after tax to live comfortably. And yet, somehow, they’ve convinced themselves this is just how it has to be.
It doesn’t.
The Replacement Test
Here’s a question worth sitting with: if you were ill tomorrow and had to hire someone to do your job, what would you pay them?
In almost every case, the honest answer is significantly more than what the business owner is currently paying themselves. Which raises an obvious follow-up: why are you working for yourself for less than you’d pay someone else to do the same work?
It’s not a trick question. It’s just a useful way of cutting through the mental gymnastics that many business owners put themselves through when it comes to their own pay. And here’s the thing — every single time this conversation comes up, without exception, the number a business owner would pay a replacement is always higher than what they’re paying themselves. Always. So the natural question is: would you go and work for someone else for what you’re currently paying yourself? The answer is almost always no. So why is it acceptable when you’re the one signing your own paycheck? It genuinely makes no sense, and yet it’s one of the most common patterns in otherwise well-run businesses.
The Tax Mindset Shift
There’s also a broader mindset issue at play here. Many business owners carry a deep discomfort around paying tax, treating it as something to be minimised at all costs rather than what it actually is — a consequence of doing well.
If you’re paying a significant amount of tax, you’re probably running a successful business. That’s worth remembering when the instinct is to pull back on your own salary to reduce the tax bill. Paying yourself properly, paying the tax that comes with it, and running a genuinely profitable business is the goal. Not the problem.
The Practical Calculation
So what should you actually pay yourself? A reasonable starting point is straightforward:
- Work out what your household genuinely needs after tax to live on
- Look at what you’d realistically pay a skilled employee to do your role
- Take whichever number is higher, and treat that as your baseline
If your business can’t support that number, that’s important information. But if it can — and for many business owners running healthy operations, it can — then there’s no good reason not to pay yourself accordingly.
Running a Business Doesn’t Mean Taking a Pay Cut
The idea that business ownership requires personal financial sacrifice is one of those beliefs that gets passed around without much scrutiny. For some people in the early stages of building something, there’s a real and temporary trade-off. That’s fair enough.
But for someone running an established, profitable business? Consistently underpaying yourself isn’t prudent — it’s just leaving money on the table while also making your business harder to value, harder to sell, and harder to understand financially.
If you wouldn’t accept the salary you’re paying yourself from an employer, it’s worth asking why you’re accepting it from yourself.
