Nobody Told Me This Was One of the Most Important Financial Decisions I'd Make as a Business Owner

Most business owners we work with spent a lot of time figuring out how to make their business profitable. Some haven't spent much time figuring out how to pay themselves efficiently.

It's understandable. When you're focused on building something, compensation feels like a detail. You take what you need, reinvest the rest, and sort it out later.

But "later" may become expensive.

It's not just about getting money out of the business

Here's what we find ourselves explaining: how you pay yourself isn't just a cash flow decision. It's a tax decision. It's a retirement planning decision. It's a wealth-building decision.

Those things are all connected. And when they're not coordinated, you may end up leaving money on the table — sometimes a lot of it.

The salary vs. distributions question

I'm not going to pretend there's a simple answer here, because it genuinely depends on your business structure. But the basic concept is this:

Salary is earned income. It's subject to payroll taxes, which means both you and the business are paying into Social Security and Medicare. It also creates "earned income" — which matters for things like retirement contributions.

Distributions are money you pull out of the business as an owner. Depending on how your business is structured, these may be taxed differently — often at a lower rate. But there are rules about how much of your income can come from distributions versus salary.  Understanding IRS guidelines is important when making these decisions.

The right mix between the two depends on your business type, your income level, your personal financial goals, and your tax situation. All of that has to be factored in together.

Where owners can make mistakes

One common mistake I see is owners who set their compensation structure early — often when they first started the business — and never revisit it. What made sense when you were pulling in $150,000 a year looks very different when you're at $500,000 or more.

Another common mistake is making compensation decisions in isolation. Your CPA might handle your business taxes. Your advisor might manage your investments. But if those two people aren't talking to each other — and talking to you together — the decisions they're each making may not be aligned.

That's the coordination gap we see more than almost anything else.

What aligned looks like

When compensation is structured well, a few things happen: your tax bill tend to come down, your retirement contributions tend to go up, and the money you're pulling out of the business is allocated to help build long-term wealth — not just funding your lifestyle.

If you haven't reviewed this recently

This is one of those conversations that's worth having even if you think things are fine. Most of the time, there's something to optimize. And in some cases, there's a lot.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.