How much should I pay myself? Owner pay for contractors

Most contractors pay themselves whatever is left at the end of the month. That is a decision, even though it does not feel like one, and it is usually the wrong one — because it means your pay absorbs every bad month while the business never has to face what it actually costs to run.

Start by separating two different things

You are two people in this business, and they get paid differently.

The worker. You turn wrenches, run calls, quote jobs, manage crews. Somebody has to do that, and if you stopped, you would have to hire for it. That has a market rate.

The owner. You took the risk, you own the equipment, your name is on the loan. That gets paid out of profit.

Lumping them together is what makes owner pay feel arbitrary. Separate them and you get a real number: what would it cost to replace me in the field, plus whatever the business genuinely earned on top.

If the business cannot cover the first number, it is not a business yet — it is a job that also owes money.

Working out the replacement number

Ask what you would have to pay someone to do the parts of your week that are actual work. A working owner running a small crew is usually doing a lead tech's job plus some estimating and admin. Look at what you pay your best tech, add something for the estimating and management, and you have a defensible figure.

That is the number your business should be able to pay you every month, in good months and bad. If it cannot, that is the finding — and it is almost always a pricing problem rather than a spending problem.

Draw or salary?

This depends on your entity, and it is worth understanding rather than guessing.

Sole proprietor or single-member LLC. You take draws. There is no payroll for you, and the business profit is taxed to you whether you took it out or not. Self-employment tax applies to the profit.

Partnership or multi-member LLC. Similar — guaranteed payments and distributions rather than wages.

S-corporation. This is where it changes. You must pay yourself a reasonable salary through payroll, with the usual withholding, and you can take remaining profit as a distribution that is not subject to self-employment tax.

That last point is why S-corp elections are common in the trades. It is also where people get into trouble.

The reasonable salary trap

The saving on an S-corp comes from taking less as salary and more as distribution. So there is an obvious temptation to pay yourself a token salary and take everything else as distribution.

The IRS is entirely aware of this. "Reasonable compensation" means what you would pay someone else to do your job — and paying a working owner $20,000 while distributing $150,000 is the pattern audits are built to find. When it is recharacterised, you owe the payroll taxes plus penalties and interest.

The defensible position is the replacement-cost number from earlier, documented. That is not a coincidence — it is the same question asked from two directions.

Why this needs your books to be right

Every number above depends on knowing your actual profit, which depends on:

• Draws recorded as draws, not as an expense. Booked as an expense, your profit looks smaller than it is and every decision downstream is wrong.
• Personal spending run through the business identified and reclassified. Almost every set of contractor books we take on has some.
• Loan principal separated from interest, so what you owe is visible.

Get those three wrong and the profit figure you are basing your pay on is imaginary.

A simple monthly discipline

Pick the salary or draw figure and pay it on a fixed date like any other bill. If the business cannot cover it, do not quietly skip it — record that it was missed. A pattern of missed owner pay is the clearest signal you have that pricing needs to move, and hiding it from yourself is how people run for years without noticing.

Then take profit distributions separately, on a schedule, from what is genuinely left after tax is set aside.

Related

• The chart of accounts a contractor actually needs — where draws and loans belong
• Why jobs that look profitable still lose you money — the pricing side of the same problem

This is general information, not tax advice. Entity choice, S-corp elections and reasonable compensation depend on your specific circumstances — decide them with your CPA.