Quick answer
How you pay yourself depends on your structure. Sole traders take drawings, which aren't an expense; tax is paid on the business profit through their IR3. Partners share profit and each file an IR3. Company owners can be paid a shareholder-employee salary, with or without PAYE deducted, or dividends, which can carry imputation credits. Whatever the structure, set a regular amount the business can afford after tax is put aside.
Key points
- Sole traders: drawings aren't a business expense; tax is on profit, not on what you draw.
- Company owners: shareholder-employee salary (with or without PAYE) and/or dividends.
- If no PAYE is deducted, tax arrives later through your own return and provisional tax.
- Pay yourself a steady, sustainable amount after tax money is set aside, not what's left.
- Review the figure quarterly with your accountant as the year's profit becomes clear.
It’s one of the first questions new owners ask and one many experienced owners still get wrong: how do I actually pay myself? The answer has two parts. The mechanics depend on how the business is structured. The amount depends on what the business can sustain, which is a cash flow question more than a tax one. Get both right and your personal finances become predictable, your business numbers become readable, and tax stops being a nasty surprise.
How does it work for a sole trader?
A sole trader and the business are, legally and for tax, the same person. You don’t pay yourself a wage; you take drawings, which are simply money moved from the business account to your personal account.
Two things follow:
- Drawings aren’t an expense. They don’t reduce the business’s profit or its tax.
- Tax is on profit, not drawings. You file an individual income tax return (IR3) and pay tax on the business’s whole profit, whether you drew all of it, some of it or none.
That second point catches people out. A sole trader who makes $110,000 of profit, draws $70,000 and leaves $40,000 in the business still pays tax on $110,000. If the drawings plus the tax exceed the business’s cash, the account empties.
How does it work in a partnership?
Partnerships don’t pay income tax themselves. The partnership files a partnership return (IR7), and each partner’s share of the profit is taxed through their own IR3. As with sole traders, money the partners take out is a distribution of profit, not a wage. A partnership agreement should set out how profit is shared and how much each partner can draw.
How does it work for a company?
A company is a separate legal entity that pays its own tax (28% for most companies) and files an IR4. Owners who work in the business usually extract money in one or more of three ways:
| Method | How it works | Tax notes |
|---|---|---|
| Shareholder-employee salary | Company pays the working shareholder a salary, often set at year end once profit is known | Can be paid with PAYE deducted, or without; if no PAYE, the shareholder pays tax through their own return and often provisional tax. Deductible to the company |
| Dividends | Company distributes after-tax profit to shareholders | Can carry imputation credits for tax the company has paid, so the same profit isn’t fully taxed twice |
| Shareholder current account | Money withdrawn during the year and recorded against the shareholder | Must be squared up, often by declaring a salary or dividend at year end; an overdrawn account has tax consequences |
Inland Revenue’s employer guide recognises that shareholder-employee salaries can be paid without PAYE deductions. In practice many small company owners draw a regular amount through the year against their current account and their accountant sets the shareholder salary at year end. That works well only if tax money is put aside along the way, because the personal tax on that salary will fall due later, often with provisional tax.
The right mix of salary and dividends depends on your income, the company’s profit, other income and longer-term plans. It’s a conversation to have with your accountant each year.
How much should you take?
This is the cash flow half of the question. A sustainable figure comes from working down from profit, not up from your mortgage.
Illustrative example. A Rotorua marketing consultancy, set up as a company with one shareholder-director, expects $160,000 of profit before the owner’s pay this year.
| Step | Amount |
|---|---|
| Expected profit before owner’s pay | $160,000 |
| Retain in the business (reserve and planned equipment) | −$20,000 |
| Available for the owner, before personal tax | $140,000 |
| Set aside for personal tax on that income (estimate with accountant) | −$36,000 |
| Available to spend over the year | $104,000 |
| Weekly drawing (rounded down, buffer for a weaker year) | $1,850 |
The owner draws $1,850 a week (about $96,000 a year), moves the estimated personal tax into a separate tax account monthly, and reviews the figures each quarter. If the year runs ahead of plan, a top-up comes later. If it falls short, the buffer means no awkward cut.
What are the common mistakes?
- Drawing whatever’s in the account. Your income then rises and falls with the timing of customer payments, and the business never builds a reserve.
- Forgetting personal tax. Especially for company owners paid without PAYE: the tax arrives later, often alongside provisional tax. See terminal tax and provisional tax options.
- Using tax money to fund drawings. The GST account is never part of your pay. See how much GST to set aside.
- Not paying yourself at all. It flatters the business’s results and makes it impossible to tell whether it can afford a manager or a successor.
- Ignoring ACC. Self-employed and shareholder-employee earnings feed into ACC levies; see ACC levies.
How do you keep personal and business money apart?
- Separate accounts for the business, business tax, and personal money.
- A fixed drawing day, weekly or fortnightly, like a payday.
- No personal spending on the business card, or if it happens, record it immediately against your current account.
- A personal emergency fund so a slow business month doesn’t force you to raid the business reserve.
Our monthly numbers check includes owner’s pay against plan as one of the extra figures worth tracking.
What about KiwiSaver and your own retirement?
Self-employed people and shareholder-employees who aren’t paid through PAYE don’t have an employer contributing to KiwiSaver on their behalf. If you want to save for retirement through KiwiSaver, you contribute directly, and you may qualify for the government contribution if you meet the conditions. Many owners also treat the business itself as their retirement plan, which works only if the business will be saleable and valuable without them. Building a business that doesn’t depend on the owner’s daily presence, and paying yourself enough to save outside it, spreads the risk.
When should you review your pay?
Quarterly, at least. The first quarter’s figure is usually conservative; by the third quarter you know roughly how the year will finish and can top up or hold back. At year end, your accountant can set the shareholder salary or dividend so tax is efficient and the current account is squared up. In your first years, your first year in business covers how pay interacts with the year-two tax squeeze.
How does your pay affect a funding application?
Lenders look at how the owner is paid because it affects both the business’s results and the owner’s personal position. Irregular drawings make the business’s bank statements harder to read; a steady, documented drawing or salary makes them clearer. For company owners, an overdrawn shareholder current account can raise questions, and personal tax arrears from salaries paid without PAYE show up in the overall picture. Keeping your own pay regular, recorded and tax-covered isn’t only good housekeeping: it makes the business easier to fund when the time comes.
What if the business can’t afford to pay you properly?
If the business can’t sustain a reasonable wage for the work you do, that’s important information. It may mean prices are too low (see charge-out rate), costs too high, or the business too small for the hours you put in. Sometimes it means the business is in a growth phase where cash is going into stock, staff or equipment, and the owner’s pay is temporarily squeezed. In that case, funding the growth properly can free the business to pay its owner again. You can see what’s possible without a credit check.
Pay yourself first, fund the growth properly
A business that pays its owner a steady, sustainable amount and still grows is a business in good shape. If the plan needs capital so you don’t have to keep taking less, talk to us. We look at unsecured options for trading businesses and loans secured on residential or commercial property. Enquiring won’t affect your credit file, your details aren’t spread around other lenders, and a real person on our New Zealand team reads what you send. The more accurate your answers, the more useful our first call. Start your enquiry.
Frequently asked questions
Are drawings tax deductible for a sole trader?
No. A sole trader's drawings are simply taking money out of the business. The sole trader pays income tax on the business's profit through their IR3 return, whatever amount they draw.
What is a shareholder-employee salary?
A salary paid by a company to a shareholder who works in the business. It can be paid with PAYE deducted, like any employee, or without PAYE, in which case the shareholder pays the tax through their own income tax return and often provisional tax.
Should I take a salary or dividends from my company?
It depends on your income, the company's profit, imputation credits, your other income and your plans. Many owner-operators use a combination. This is a decision to make with your accountant each year.
How much should I pay myself?
Start from what the business can sustain after tax, loan repayments and a contribution to its cash reserve. Many owners set a modest fixed amount and top up later in the year once profit is clearer.
Does a shareholder salary affect ACC?
Yes. Shareholder-employee earnings are used for ACC levies, drawn from the company's income tax return, so a shareholder salary is relevant to the company's ACC invoice.