When you’re running your own business, it’s easy to get caught up in servicing clients, managing staff, or chasing payments — and forget one very important detail: how do you pay yourself?
Unlike employees who receive regular wages, small business owners need to be more strategic about how they take money out of the business. The two main methods are wages and drawings, and each approach has different tax, legal, and financial implications depending on your business structure.
Here’s a breakdown of the options, how they work, and what’s best for your situation.
Understanding the Two Methods
1. Drawings
A drawing is when a business owner takes money out of the business for personal use, usually without processing it through payroll. This method is most common for sole traders and partnerships.
When you operate as a sole trader:
- You and the business are legally the same entity.
- Any profits the business earns are taxed as your personal income. You don’t need to pay yourself a “wage” because you’re not considered an employee of your business.
Instead, you simply “draw” money from the business bank account for personal use. These drawings are not tax-deductible for the business and don’t attract PAYG withholding tax or superannuation contributions. However, they do reduce the total profit remaining in the business.
2. Wages (or Salary)
Paying yourself a wage involves setting up payroll and treating yourself as an employee. This approach is typically used by owners of Pty Ltd companies or trusts.
If you’re operating under a company or trust structure:
- The business is a separate legal entity from you.
- You can become an employee and pay yourself a regular salary.
- This salary is treated as a business expense and reduces the company’s taxable income.
- The business must withhold PAYG tax and make compulsory superannuation contributions.
Wages provide a more structured and compliant way to take money out of the business and often appeal to those seeking personal income stability.
Pros and Cons of Each Approach
Drawings – Pros:
- Simple and flexible, with no need to run payroll.
- No need to calculate PAYG or super.
- Useful when income is irregular or seasonal.
Drawings – Cons:
- Not a deductible business expense.
- No super contributions unless you make them voluntarily.
- Less formal structure may lead to poor financial planning.
Wages – Pros:
- More professional structure.
- Tax-effective for companies (reduces business profit).
- Super contributions build retirement savings.
- Easier to apply for personal loans or mortgages with regular payslips.
Wages – Cons:
- More admin involved: payroll setup, PAYG withholding, super, Single Touch Payroll (STP) reporting.
- Less flexibility if cash flow is inconsistent.
What’s Best for Your Business?
The right method depends heavily on your business structure and financial goals.
- Sole traders and partnerships are best suited to the drawings method. Since all profit is treated as personal income anyway, it makes little sense to run payroll.
- Companies and trusts, however, must take a more structured approach. If you’re the director or shareholder of a company, you can pay yourself either a salary (as an employee) or take dividends/distributions—each with different tax implications.
In some cases, a combination of methods is appropriate. For example, a business owner might pay themselves a modest wage for consistency and draw additional funds as dividends or bonuses when profits allow.
Don’t Forget Superannuation and Tax
Regardless of how you pay yourself, it’s important to plan for:
- Super contributions: If you’re not on payroll, consider making personal super contributions to build your retirement savings and potentially claim a tax deduction.
- Quarterly or annual tax payments: Especially for sole traders and partnerships, drawings don’t automatically set aside tax. Work with your accountant to estimate and save for your tax bill.
- Record-keeping: Even if you’re taking drawings, maintain good records of all withdrawals to track what you’re taking out of the business and how it affects overall profitability.
The Role of a Good Accountant
Choosing the right method and managing your tax efficiently is easier with expert advice. A good accountant will:
- Help you determine the most tax-effective way to pay yourself.
- Set up payroll correctly if you’re operating a company or trust.
- Guide you on how much to set aside for tax and super.
- Provide clarity on ATO obligations and avoid compliance issues.
Final Thoughts
Paying yourself as a small business owner isn’t as straightforward as receiving a salary from an employer. The method you choose — wages or drawings — affects not just your tax and super obligations, but also your personal income stability and business cash flow.
Take time to understand your structure, review your goals, and seek professional advice to find the right approach for your situation. Done right, paying yourself is not just a reward for your hard work — it’s a strategic move to ensure both your business and personal finances are on solid ground.
