The Role of Tax Planning in Owner Salary Decisions

The Role of Tax Planning in Owner Salary Decisions

How to avoid surprises, stay compliant, and keep more of what you earn

One of the biggest mistakes small business owners make when deciding how much to pay themselves?

They forget about taxes.

It’s easy to get caught up in your revenue and expenses, but when it comes to building a sustainable salary, tax planning isn’t optional—it’s essential.

In this post, you’ll learn:

  • Why your business structure changes how you’re taxed

  • How taxes affect your take-home pay

  • How to avoid underpaying (or overpaying) taxes

  • Smart tax planning moves that help you keep more of what you earn

Whether you’re taking owner’s draws or paying yourself through payroll, understanding your tax responsibilities can mean the difference between peace of mind and an April panic.

Why Your Business Structure Matters

The way your business is legally formed directly affects how you're paid—and how you're taxed.

Here’s a quick breakdown:

Sole Proprietors & Single-Member LLCs

  • You don’t run payroll. You take owner’s draws (manual transfers from your business account to your personal account).

  • You pay self-employment taxes (typically 15.3%) on your profit, not just your draws.

S Corporations (S Corps)

  • You’re required to run payroll and pay yourself a “reasonable salary.”

  • You pay regular income tax on your salary, but avoid self-employment tax on distributions (profit above your salary).

  • This structure can save money—but requires more planning and compliance.

Multi-Member LLCs or Partnerships

  • You pay taxes on your share of the business’s income, regardless of how much you actually draw.

  • Partners often take guaranteed payments or draws, but must plan carefully for their tax burden.

The takeaway:
Your salary isn’t just a cash flow question—it’s a tax decision.

How Taxes Impact Your Take-Home Pay

Let’s say your business makes $100,000.

If you don’t factor in taxes and take home $80,000… you might be in for a surprise.

Depending on your structure, you may owe:

  • Self-employment tax (15.3%)

  • Federal income tax (based on your tax bracket)

  • State income tax (varies by location)

  • Additional taxes (like city or local business taxes)

That could add up to $25,000–$35,000 in taxes—money you need to set aside in real time, not figure out after the fact.

That’s why we teach every owner inside The Small Business Planner to create a Tax Account and automate regular contributions.

How Much Should You Set Aside?

A general rule of thumb:

  • 15–20% if your income is modest and you have deductions

  • 25–30% if you’re earning six figures or more

  • More if you live in a high-tax state or city

Set aside a percentage of gross revenue or net income (depending on your CPA’s advice) every time you get paid.

Better yet, work with your bookkeeper or tax preparer to estimate quarterly tax payments so you’re never caught off guard.

How Tax Planning Affects Salary Structure

If you're an S Corp owner, the IRS requires that you pay yourself a “reasonable salary” before taking distributions.

Here’s where strategic planning comes in:

  • If your salary is too low, you risk IRS penalties.

  • If your salary is too high, you could pay unnecessary payroll taxes.

Smart tax planning finds the sweet spot—enough to meet IRS guidelines, but not so much that it eats into your profitability.

A good CPA can help you:

  • Set an appropriate salary

  • Split compensation between salary and distributions

  • Make sure you’re withholding the right taxes

  • Stay compliant while maximizing your take-home pay

Final Tips for Owner Salary + Tax Planning

  • Set up a Tax Account and contribute to it regularly.

  • Don’t confuse “money in your account” with “money you get to keep.”

  • Review your salary structure and tax plan every year—especially if your income grows.

  • Work with a CPA who understands your business model—not just tax codes.

  • Use a financial system (like The Small Business Planner) to keep everything organized and visible.

Final Takeaway: Tax Planning Isn’t Extra—It’s Essential

Paying yourself isn’t just about what’s fair or what feels good.
It’s about what’s strategic, legal, and sustainable—and that means including taxes in your plan from the start.

Inside The Small Business Planner, you’ll find:

  • Tools to estimate and track your tax savings

  • Systems to pay yourself with confidence

  • Real-world guidance to help you stay compliant and calm

Explore The Small Business Planner → https://smallbusinessplanner.com/products/planner

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