Every entrepreneur dreams of freedom — freedom of time, freedom of money and the freedom to build a life on your own terms. But the way you pay yourself has a bigger impact on that freedom than most people realize.
Compensation isn’t just a tax decision. It’s a stability decision. It’s about separating your personal and business finances, avoiding surprises at tax time and setting up a long-term foundation for your wealth. Paying yourself properly is one of the most important habits you can build as a business owner.
Start with your lifestyle needs
Before we get into tax strategies or business structures, start with one simple question: how much do you need to live your life?
Your lifestyle determines the baseline for how much you should be pulling from your business — not the other way around. If you wait seven months to pay yourself, how are you covering groceries, your mortgage or your kid’s hockey fees in the meantime?
Your business exists to support the life you want to live. You should be set up to take home enough to cover your personal expenses consistently. Once you know what you need personally, you can look at your business finances and figure out whether it can support that amount reliably — or whether adjustments are needed.
Understand the tax impact before you take money out
The biggest headaches we see always come from surprises — specifically tax surprises.
When you pay yourself, there’s always a tax consequence. One on the business side. One on the personal side. And without proactive planning, those consequences can snowball fast.
Here’s a scenario we never want to see:
You’ve had a successful year, you see a healthy bank balance, and you decide to pull out $150,000 in dividends. You spend it — because that’s what the money was there for, right? But nobody flagged that you would owe $30,000–$40,000 in personal tax on that income.
Now it’s tax season, the bill hits, and suddenly you’re scrambling. When you were an employee, the taxes were taken off automatically — you never had to think about it. As a business owner, you’re responsible for everything. Taking money out without a plan is one of the fastest ways to land in financial trouble.
The difference between salary and dividends
One of the most common questions we get is, “Should I pay myself a salary or dividends?” The truth: it’s one tool in a much bigger strategy. It’s never as simple as “always pay dividends” or “always pay salary.”
Both options have benefits and drawbacks. What matters is what’s right for you, your business and your long-term goals.
Salary
- Creates consistent income — great for budgeting and personal cash flow
- Helps you look good to mortgage brokers and lenders who want predictable pay
- Allows your business to deduct payroll expenses
- Builds your CPP contributions
Dividends
- Can be tax-efficient at certain income levels
- Offer flexibility in timing
- Don’t require CPP contributions (which can be good or bad depending on your retirement plan)
Salary becomes especially important when certain benefits or government programs require it. During COVID, many owners who only took dividends found themselves excluded from supports they otherwise would’ve qualified for.
This is why salary vs. dividends is never the whole story. Your compensation plan should be based on what you need, how your business is performing and what your long-term goals look like.
How is your business performing?
Once you know your lifestyle needs and have a handle on the tax considerations, the next step is to look at your business performance.
Is the business generating enough predictable revenue to support the amount you want to pay yourself? If your cash flow is strong, does it make sense to pull out more now — or leave some in the business for upcoming expenses or opportunities?
A common mistake is letting too much cash pile up in the company without a plan. It feels great to see the bank account grow, but remember: eventually, most of that money will come out and be taxed personally.
It’s often better to spread out your compensation over several years. Getting taxed on $100,000 each year for five years usually costs you far less than pulling out $500,000 at once.
What is your long-term financial plan?
Your retirement as an entrepreneur looks different than an employee’s. CPP will play a role if you choose salary — but for many business owners, your retirement plan is your business itself. You’re building an asset you may eventually sell.
This is why your compensation strategy isn’t just about this year — it’s about the next 10, 20 or 30 years.
If you’re thinking ahead to retirement and want to build CPP, salary may be the right call. If you prefer more flexibility and plan to build your wealth inside the business or through investments, dividends may make sense. Most of the time, a blend of both is the sweet spot.
The right compensation plan should:
- Cover your lifestyle comfortably
- Avoid tax surprises
- Support business stability
- Build long-term wealth aligned with your goals
Avoid surprises by planning ahead
Surprises happen when you take money out without a plan. When you don’t think through the tax impact. When your accountant doesn’t give you the full picture.
A good advisory team helps you:
- Understand exactly how much you can take out
- Limit your tax bill
- Balance salary and dividends strategically
- Build predictable personal income
- Preserve cash flow for the business
- Plan several years ahead
Owner compensation shouldn’t be a guessing game. It should feel steady, intentional and aligned with the life you’re trying to build.
Plan ahead with expert insight
If you want to get this right — and avoid the stress that so many business owners face with taxes and cash flow — let’s talk. Our advisory team can help you look at your business, your goals, and your personal needs and build a compensation plan that actually works for you.
Want to dig deeper? We’ve got two great free resources to help you build a strong foundation:
Starting a Business is one of the biggest achievements of your life. Paying yourself properly is how you make sure it actually supports the life you want today — and the future you’re building for tomorrow.
