Most business owners are paying themselves incorrectly. Not a little wrong. A lot wrong. And the IRS is perfectly happy to let them keep doing it.
The most common mistake? Paying yourself too much as a W-2 because you don’t know how to get money into your company properly. You take the check, you pay the tax, and then you live on what’s left. The wealthy don’t play that game.
I pay myself $42,000 a year. My daughter and I have immaculate health care because my coverage is based on my salary, not on everything my S-corp and LLC make. That is not an accident. That is structure. And it’s completely legal.
Here’s what most business owners don’t understand: the goal is to keep the money in the company as long as possible, activate every available deduction, and pay tax at the very last minute. Companies get the best tax strategies. Individuals get the worst. The sooner you run your financial life like a business, the sooner that change will come.
Your Entity Type Determines Everything
The most tax-efficient way to pay yourself depends completely on your entity structure. An LLC, an S-corp, a C-corp, a limited partnership, and a sole proprietorship all carry different weights and different rules.
In an LLC, you have a manager and a member. You may take a distribution. You may be employed there. How you pay yourself flows directly from how the company is structured and how it pays its own expenses first.
S corporations allow you to split income between salaries and distributions. Distributions can be necessary in the early days, but as you grow, they become another taxable event. And here is something most people miss: if you want to qualify for a loan or access affordable health care, your salary, not your S-corp’s total income, is what counts. A $42,000 salary qualifies for coverage that a $1 million S-corp income would price you out of.
“Companies make the money and have all the deductions. You get taxed. The least amount you can pay yourself into your personal bank account, the better.”
That is the principle. That is the architecture that every wealthy business owner I know has built their life around. In The Millionaire Maker, I write it plainly: “Every single wealthy person that I know has done it inside a corporate structure.” Entity structure is not paperwork. It is the difference between keeping your money and giving it away.
The Biggest Compensation Mistakes Business Owners Make
Mistake one: paying yourself too much because the company isn’t set up to cover your life.
In the beginning, when a business isn’t generating enough revenue to cover its expenses, you have two choices. You loan the company money, and when it earns, it repays you. Or you invest equity into it, funding it to cover the deductions you’re building toward. What you don’t do is pull a large paycheck because it feels safer. That move costs you every time.
Mistake two: taking money through an owner draw instead of a proper distribution.
This is not a minor accounting question. Taking cash through an owner draw affects your balance sheet in ways that cause real problems later. Bookkeeping matters. Entity hygiene matters. If you don’t have a sharp bookkeeper and a tax strategist working in sync, you are leaving money on the table and possibly creating liability you don’t see coming.
Mistake three: operating on the same payroll system as your employees.
I see this constantly with construction business owners. The owner runs payroll the same way every subcontractor does, which means every benefit and salary comparison follows suit. When you operate through a separate entity, you set your own compensation structure. Your employees sit in one company. You sit in another. That separation protects you and opens up strategies they don’t qualify for.
“When you pay yourself wrong, you overpay taxes. It’s just that simple.”
Your Family’s Compensation Is Part of the Strategy Too
This is the piece most people miss entirely. You are not just structuring your own compensation. You are structuring your family’s.
The tax code allows legitimate business expenses for family members who do real work in your business. Salaries paid to children who actually work, housing allowances, vehicle allowances, technology allowances, travel allowances: these are all legal, all documented in the tax code, and all available to you right now if your entity is set up to capture them.
My daughter works in the business. She is compensated correctly. The income she earns is taxed at her rate, not mine. The deduction runs through the company. That is one example of what proper structure looks like in practice.
The 81,000 pages of the tax code are not there to protect the IRS. Most of them are deductions. The question is whether you have a tax strategist who knows how to activate them for your specific situation.
How to Structure Your Compensation Starting Now
The answer is not a formula you can grab from a 10-minute video and apply on your own. I say that not to protect my team’s business but to protect yours. When clients come to us six months after doing this themselves, we see the damage. Real damage. Taxable events are created unnecessarily. Distributions that triggered the wrong treatment. The owner drew that which wrecked the balance sheet.
Here is what the process actually looks like:
- Get a tax strategist, not just a CPA. Most CPAs are historians. They record what you did. A tax strategist looks forward and tells you what to do differently before the taxable event happens.
- Work toward the lowest defensible salary. For most professionals who are not engineers, doctors, or lawyers, running a licensed practice offers real flexibility. If your strategist can get your W-2 down to the $100,000 to $105,000 range, you may qualify for a Roth IRA. The downstream benefits multiply from there.
- Run as much of your life as legally possible through your entity—phone, vehicle, office, meals, travel, education. If the expense is legitimately tied to the business, the company pays it. You personally stop paying for things the company should be paying for. That is how I live on $42,000 a year while the companies cover the rest.
- Meet with your strategist quarterly. This is not a once-a-year conversation. Tax strategy is active, not passive. Industry norms shift—so does your income. The structure needs to keep up.
Every $10,000 you overpay the IRS in a year, invested at 12% over 20 years, is $1.1 million you handed to the government instead of putting into real estate, gas and oil, or your own asset base. That math is not abstract. That is exactly what is happening right now for business owners who have not built the right structure.
Start Today
You do not need to have this all figured out before you begin. You need to take the first step.
- Audit where your salary actually sits right now. Is it reasonable for your industry? Is it as low as it can legally be?
- List every expense you are currently paying personally that the business could be paying instead.
- If you do not have a tax strategist (not just a tax preparer), that is the call to make this week.
- Go to AskLoral.com and ask a question or make a request. My team works with business owners every day on exactly this. We will look at your structure and compensation and show you what the right numbers should be.
The game is not how much you make. The game is how much you keep. Go to AskLoral.com Ask a question, make a request.
