How To Pay Yourself When Self-Employed


One of the hardest things to do is to pay yourself when self-employed. When starting a business, entrepreneurs are often tempted to reinvest everything into the company they are building instead of cutting themselves a salary. But neglecting to work a liveable wage into business operations right from the get-go often leaves the company in a lurch later.

In 2015, I left my full-time job to devote all of my efforts to building Money After Graduation. I’d like to say I was organized and top of things right from the beginning, but it actually took me more than 12 months to really get my business working, particularly my business finances.

Believe it or not, one of the things I struggled with most was paying myself.

How much should you pay yourself when self-employed?

A good rule of thumb that I wish I learned in my first year of business is:

For up to $250,000 in gross revenue, you should pay yourself when self-employed 50% of what your online business earns.

So if your business is earning $3,000 per month, $1,500 should be going straight into your pocket as net personal income, and $1,500 should remain in the business to help it grow. This suggestion comes from the girls at Being Boss, which is one of my favorite entrepreneurship podcasts. It’s also the recommended distribution in the book Profit First, which is an essential read for anyone starting their own business of any kind.

The nice thing about online businesses is they have very low overhead compared to brick and mortar stores. You need virtually no equipment beyond a computer, you can work from anywhere which negates the need for office space, and most online tools are extremely affordable. However, as your business grows, costs tend to increase.

The larger your email list and the larger your demands on the software you use to serve your audience, the more you’ll pay since these are often charged per subscriber. Likewise, as your reach grows, so does the expectation of quality and frequency of the content you produce, which means you’ll need to invest in professional cameras or design services.

One of the things I think holds a lot of bloggers or other online entrepreneurs back from growing their business is the hesitation or reluctance to invest in the tools they need to make it grow because these can end up costing hundreds or even thousands of dollars per month.

You need to remove the mental barriers that view $1,000 or $2,000 of monthly business expenses as costs that reduce your personal income and accept the reality that a six-figure online business will have multiple five-figures of annual base costs in order to run.

This is why the 50% rule works so well: it allows you to pay yourself an amount proportional to your success, while still give you ample additional resources to reinvest in your business.

Should you set yourself up as a sole proprietor or a corporation?

Money After Graduation is an incorporated company. For my first few years blogging and freelancing, I operated as a sole proprietor, claiming my online earnings as “other income” when I filed my taxes. Once I switched to creating and selling digital products, I incorporated my company for both liability protection and more precise income control. In the USA, you incorporate your company as an LLC (limited liability corporation). In Canada, you incorporate as Inc. (incorporated).

As a sole proprietor, you are your business. Any income you earn is taxed at your personal income tax rate. However, you can claim business expenses as a tax-deductible expense when you file your income taxes, reducing the personal burden of the cost of doing business.

For most small or side businesses solely operated by the owner, a sole proprietorship makes sense. However, depending on the long-term goals of your company (ie. growing to the point you need to hire employees) or the products you sell, a corporation might be a better choice.

As a corporation, your business is a separate entity. It’s more expensive to set up, but in the long run, it gives you additional perks and privileges you can’t access as a sole proprietor, not the least of which is legal protection.

Like a sole proprietor, if you operate your incorporated business from home, you can still claim a portion of your home expenses as business expenses. You simply issue yourself an expense cheque to pay for the correct amount, and this is recognized as tax-deductible business expenses.

Should you pay yourself a salary or a dividend?

Because you’re taxed at a lower rate on dividends, many people think they’re preferable to paying yourself a salary through your company. However, there are many benefits to taking a salary up to a certain amount.

By choosing to pay yourself when self-employed a salary instead of a dividend, it’s true that you pay more in income taxes, but you also contribute to the Canadian Pension Plan (CPP) and receive RRSP contribution room to save for your own retirement.

The annual maximum pensionable earnings for CPP is only $55,300, so you may elect to set your salary at that amount and then pay any additional income as a dividend to take advantage of a lower tax rate.

The annual maximum for RRSP contributions is $26,010, which means your salary would have to be $144,500 in order to receive the maximum RRSP contribution room. I was advised by my accountant to pay myself a salary until I reached the maximum RRSP contribution room and then switch to dividends for any additional income I want to pay myself.


One of the downsides most sources list for paying yourself a salary instead of a dividend is the paperwork. You need to keep track of your  CPP owing and issue yourself a formal T4 at the end of the year in order to file your personal income taxes. However, these tasks are easily avoided by simply subscribing to payroll software to do the math for you.

What about taxes?

If your business is small and earning less than $30,000 per year, taxes won’t give you too much trouble. As your business grows, you have to worry about taxes on three different fronts: sales taxes, personal income taxes, and corporate taxes.

For sales tax

You do not need to collect GST or HST on your sales if your company is earning less than $30,000. Below this threshold, you’re considered a “small supplier” and the government will more or less ignore you.

Once you gross more than $30,000, you must collect GST/HST from your customers and clients, and remit this money to the government at tax time.

If you do business in only your province, this is fairly straightforward, but if you run a business like I do that sells products across Canada and to the US, you need to be extra diligent about who you’re charging and how much to make sure you get it right.

For personal income taxes

If you’re not using software to calculate your income tax and CPP contributions, a good rule of thumb is to set aside 30% of the gross income you’re paying yourself to cover your tax bill at the end of the year.

This will likely be more than enough and you’ll even get to keep a little bit of it leftover, but if it does end up falling short, you’ll only be short a small amount.

For corporate taxes

If you’re a small business, your corporate income tax bill will likely be so small it might actually be non-existent. If you have a large corporate tax bill, you’re doing one of two things wrong: not investing your business or not paying yourself enough. Remedy the error of your ways before you file your taxes!

Use bookkeeping & payroll software to do all the math for you

If the above section bored you to tears, I don’t blame you. Nobody likes taxes. They’re boring and complex and therefore best when calculated by a computer. For all my love of everything personal finance, I have no enthusiasm for managing my business finances — which is why I rely almost entirely on software to do it for me.

I use Freshbooks to send invoices, track product sales, and manage expenses for my business. It connects directly to my business bank account and credit cards and scrapes the charges so I don’t have to manually enter any expenses. It also produces expense reports and profit & loss statements, so I can readily see exactly where I stand at any time. My accountant has access to my Freshbooks account to retrieve all the numbers she needs to file my return.

I use Wagepoint to pay myself. This platform charges me $25 every time I run payroll but relieves 10x that effort. On a monthly pay schedule, this amounts to $300 per year. If you’re frowning at adding $300 more to your business expenses, I want to point out that not only does Wagepoint calculate all my income taxes and CPP contributions, the program remits these fees to the Government of Canada for me.

I don’t have to hire an accountant to do all the calculations at the end of the year or be disciplined enough to set aside money for personal income taxes and CPP contributions from each paycheque. The end result is a formal T4 for me from my company and nothing left undone. The $300 in fees per year is more than worth it!

End result: business and personal finances completely taken care of with virtually no effort on my part. Perfect.

Don’t forget to give yourself extra perks and benefits

One of the best things I did for my business and myself is set up a Health Spending Account through my corporation, which lets me claim up to $3,000 in health-related expenses as business expenses.

Because this money I would otherwise spend as net income, I count my $3,000 per year of business expenses to my health spending account as part of the 50% of my total business revenue that I allocate to personal income. This allows me to lower my salary without lowering my lifestyle.

The best part? Unused contributions to my health spending account can be carried forward to future years, so if I don’t manage to use up the full $3,000 in a single year, whatever is leftover can be used the following year for health expenses. If you feel like you need more massages in your life, this is how you afford them!

As mentioned before, if you’re running your business from your home, a portion of your household expenses including rent and utilities can be claimed as business expenses. All you need to do is dedicate a specific room or area of your home to your company, and that square footage is used to determine how much of your household expenses you can claim as business expenses (to a maximum). This is one of the best ways to relieve some of the burdens of your costs of living and give your business a further tax break.

Final thoughts on how to pay yourself when self-employed

Running your own business means taking your finances seriously, so you have to stay on top of them so you know where you stand. However, you can (and should!) automate as much of the tracking and categorizing with software to relieve the burden — and the chance of human error. You can do the bookkeeping yourself, but hire a professional accountant to take care of your business taxes at the end of the year.

One of the best things you can do is invest in your business. It’s an extension of investing in yourself.

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9 Comments. Leave new

  • Oooh, thank you for talking about this! My blog is pretty much just a fun hobby, but I do daydream about turning it into a full-time business. Thanks for sharing what it takes to make it happen. 🙂

    • You’re very welcome!! I wish I had managed my business finances better right from the get go… so happy to help anyone that’s in those beginning stages so they don’t make the same mistakes I did!

  • Wagepoint is thrilled to have you as a customer. We also shared your post with our followers.

  • Awesome post. The biggest barrier for many people is making that mental leap to go “all-in” and invest in their business to make it grow. I’m guilty of this as well. Thanks for sharing the tax information and best practices for money you should be personally retaining. That’s what it’s all about at the end of the day!

  • I thought running my own business would bring me endless freedom and time. LOL, boy was I naive. It’s harder work than ever and yes, you need to take FULL RESPONSIBILITY for your finances, cause the buck truly does stop with you when you run your own business.

    Thanks for this. Jack.

  • Amazing write up! As an I.T. consultant running an incorporation, your insight into setting up a health spending account was a great revelation. If possible, it would be great if you can also do a short blog article on the different expenses which can be written of as tax deductions towards an incorporation. Thank you!


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