5 Expensive Mistakes Business Owners Make When Paying Themselves

Have you ever taken money out of your business and later realized it caused a bigger problem than you expected?

Maybe you wondered if you took too much, not enough, or felt that pit in your stomach when your accountant mentioned your tax bill.

For many business owners, paying yourself feels deceptively simple… until it isn’t. One decision can quietly trigger cash shortages, surprise tax bills, or financial stress months down the road.

At Patrick Accounting, we see this all the time. And it doesn’t mean you're reckless or irresponsible. You're simply making decisions without a clear system, complete information, or an understanding of the future consequences.

This article isn’t about how to pay yourself as a business owner. We’ve covered that in detail elsewhere. Instead, we’re breaking down the five most expensive mistakes we see business owners make when paying themselves, and why these missteps so often lead to avoidable financial pain.

Once you recognize these patterns, you’ll be far better equipped to protect your income, your cash flow, and your peace of mind.

Why These Mistakes Are So Common

The shift from employee to business owner changes how money works, but most people aren’t prepared for how dramatic that change really is.

As an employee, your paycheck was predictable. Taxes were withheld automatically. Someone else handled the timing, the math, and the compliance. As a business owner, all of that responsibility lands on you, often without clear guidance or guardrails.

The bigger issue is that most business owners don’t get proactive financial advice. Accountants are frequently brought in after the fact, usually at tax time, when the decisions have already been made and the money is already spent.

So, owners do what seems reasonable in the moment: They look at their bank balance, make judgment calls, and hope it works out. Sometimes it does. Often, it doesn’t.

We’ve covered the mechanics of paying yourself properly in our article, “What’s the Right Way to Pay Yourself from Your Business?” But what that guide can’t fully prepare you for are the patterns of behavior that quietly lead to expensive mistakes, especially as your income grows.

These five mistakes show up again and again, even in profitable, well-run businesses. The good news is that once you understand why they happen, they’re much easier to avoid.

Mistake #1: Taking Money Out Without Setting Aside for Taxes

Your business has a great year. Money starts piling up in the bank, so you begin taking regular draws. You upgrade your lifestyle with a new car, a home renovation, maybe a family vacation.

Everything feels fine… until April.

That’s when your accountant tells you, “You owe $60,000 in taxes.”

Your stomach drops. You don’t have $60,000 sitting around. You already spent it.

This is one of the most common and expensive mistakes business owners make: treating untaxed money as if it’s already theirs.

Why This Happens

When you were an employee, taxes were withheld automatically. You never saw the full amount, so you never had the chance to accidentally spend the IRS’s portion.

As a business owner, especially in a sole proprietorship, partnership, or pass-through entity, there’s no automatic withholding. The money lands in your account looking like spendable cash. The tax bill doesn’t show up for months, which makes it easy to underestimate how much you actually owe.

Delayed consequences create false confidence.

The Real Cost

The damage goes far beyond the tax bill itself:

• Scrambling to come up with cash, often by taking on debt
• Penalties and interest if you can’t pay on time
• Constant anxiety about whether you’re setting aside enough
• Second-guessing every financial decision because you don’t trust the numbers

Even profitable businesses get trapped in this cycle, not because they’re failing, but because they don’t have the visibility they need.

How To Avoid This Mistake

The fix isn’t complicated, but it does require being intentional.

You need a system that separates tax money from spendable money before lifestyle decisions are made.

That usually means:

• Automatically setting aside a percentage of incoming money for taxes
• Keeping that money out of your operating and personal accounts
• Revisiting the numbers throughout the year as income changes

The exact percentages and mechanics matter, and they depend on how your business is structured. But the principle is universal: If tax money stays in your main account, it will eventually get spent.

Mistake #2: Paying Off Personal Debt Without Considering Tax Implications

We once worked with a business owner who saw $100,000 sitting in his business account and decided to pay off his mortgage in one shot.

For him, this felt incredible. No more monthly payments. It was a huge personal milestone.

A few weeks later, we had to deliver some bad news: “You’re going to owe about $60,000 in taxes on that profit.”

His face went pale.

“But I just paid off my house,” he said. “Where am I supposed to get $60,000?”

He ended up opening a home equity line of credit to cover the tax bill, essentially borrowing against the house he had just paid off.

In trying to eliminate one type of debt, he accidentally created a far worse one.

Why This Happens

Paying off personal debt feels like a smart, responsible move. It’s emotionally satisfying and easy to justify, especially after a strong year in the business.

What often gets overlooked is that not all of the money in your business account actually belongs to you yet. When taxes haven’t been accounted for, large personal purchases are effectively being made with money that already has a claim on it.

The emotional relief of being “debt-free” can sometimes override strategic timing.

The Real Cost

Again, the damage isn’t just the tax bill:

• Scrambling for cash after the fact
• Taking on new debt under worse terms
• Losing flexibility in your personal finances
• Turning a strong business year into a stressful one

Even worse, these decisions can’t be undone once the money is gone.

How to Avoid This Mistake

Before making any large personal purchase with business money, pause and ask a better question:

“If I take this money out now, what else am I committing myself to?”

That usually means:

• Understanding the tax obligation tied to the withdrawal
• Thinking about when the money is coming out, not just how much
• Making big personal financial moves after tax obligations are clearly accounted for

The goal isn’t to avoid paying off personal debt. You want to avoid doing it at the wrong time, for the wrong reasons, with the wrong money.

Mistake #3: Confusing Profit with Cash in the Bank

You look at your P&L (profit and loss statement) and see $100,000 in profit.

You look at your bank account and see $50,000.

Naturally, the question is: "Where did the other $50,000 go?"

Profit tells you what you earned on paper, not what you can safely take home.

Profit doesn't equal cash.

Why This Happens

This mistake usually shows up after a business owner starts paying closer attention to their numbers. They’re reviewing reports, tracking profitability, and trying to make smarter decisions.

The problem is that accounting profit and cash flow are not the same thing.

For example:

• You make a $50,000 loan payment
  • $10,000 is interest (an expense)
  • $40,000 is principal (not an expense)

You had to write the full $50,000 check, but only $10,000 shows up on your P&L. The other $40,000 reduced your cash without reducing your profit.

The same thing happens with:

• Equipment purchases
• Vehicle purchases
• Inventory buys
• Debt paydowns

Your profit can look strong while your cash quietly disappears.

The Real Cost

When profit is mistaken for available cash, business owners often:

• Take out money they actually need for upcoming obligations
• Leave the business underfunded and fragile
• Create cash crunches that feel sudden but were entirely predictable
• Lose confidence in their financial reports altogether

In many cases, owners aren’t taking too much money, they’re taking it at the wrong time.

How to Avoid This Mistake

Before pulling money out of the business, you need clarity on one thing:

“How much cash is truly available after all near-term obligations?”

That typically means:

• Looking beyond your P&L
• Understanding upcoming loan payments and large expenses
• Reviewing a basic cash flow view, not just profit

You don’t have to become an accountant here (but you should work with one). You just need to avoid paying yourself based on numbers that don’t reflect reality.

Mistake #4: Letting Lifestyle Grow Faster Than Tax Planning

Your business grows from $100,000 in revenue to $700,000 over a  few years. Naturally, your lifestyle grows with it. 

A new truck, a boat, a big vacation. Maybe even a down payment on a second home. Nothing about this is reckless. It feels like the reward for years of hard work.

The problem is that the problem shows up later.

Quarterly estimated taxes come due. "I'll catch up next quarter," you tell yourself. Business is good, cash is coming in, and there’s always time to fix it. Right?

Then, December arrives. Not long after, your accountant says: "You're going to owe about $200,000 in taxes."

And suddenly, you have no idea where that money is supposed to come from.

This mistake doesn’t necessarily mean you’re overspending. It means you’re underestimating how quickly tax obligations scale with success.

Why This Happens

As income increases, taxes don’t rise in a straight line. Marginal tax rates climb. Additional taxes kick in. The percentage owed often grows faster than business owners expect.

At the same time, higher income creates confidence. It becomes easier to justify delaying estimated payments because future cash feels guaranteed.

Growth creates optimism. Taxes create obligations. And when those two get out of sync, problems follow.

The Real Cost

When lifestyle expansion isn’t paired with tax planning, the fallout can be severe:

• Massive year-end tax bills with no clear funding source
• Draining savings or liquidating assets to cover taxes
• Taking on debt just to stay compliant
• Starting the next year already behind

Many owners then fall into a dangerous cycle of paying last year’s taxes while trying to keep up with this year’s obligations.

How to Avoid This Mistake

Lifestyle expansion isn’t the problem here. It just needs to happen after taxes, not before them.

That means:

• Treating estimated tax payments as non-negotiable
• Updating projections as income grows
• Assuming that a significant portion of each new dollar earned won’t be yours to spend

But the most important mindset shift is to realize that higher income means higher responsibility, not more flexibility.

Mistake #5: Paying Yourself Without a System

You take money out of your business whenever it feels right.

Some months it’s $10,000. Other months it’s $50,000. There’s no schedule, no baseline, no clear logic. Just a glance at the bank balance and a judgment call.

At first, this feels flexible. Eventually, it becomes exhausting.

When there’s no system, every decision feels risky because it is.

Why This Happens

Most business owners were never taught how to pay themselves. There’s no default structure, and committing to a set approach can feel scary, especially when income fluctuates.

So instead of choosing a system, owners delay the decision altogether. They “figure it out” month by month, telling themselves they’ll formalize things later.

The problem is that inconsistency makes planning impossible. For you and your accountant.

The Real Cost

Without a system in place, business owners often experience:

• Constant anxiety about whether they’re taking too much or too little
• Feast-or-famine personal cash flow
• Surprise tax bills because projections were never reliable
• Reactive decisions instead of strategic ones

Even profitable businesses feel unstable when compensation is unpredictable.

And without consistency, meaningful tax planning can’t happen.

How to Avoid This Mistake

The solution is structure, and it doesn’t have to be perfect.

Any consistent system is better than guessing.

That system might be simple or sophisticated. It might evolve over time. What matters is that it creates:

• Predictability
• Visibility
• The ability to plan ahead

Frameworks like Profit First can work well for some businesses, but no single approach fits everyone. The right system is the one that aligns with how your business earns money and supports sustainable decision-making.

The moment you stop winging it, everything else gets easier.

The Pattern Behind All Five Mistakes

These mistakes may look different on the surface, but they all stem from the same underlying patterns.

1. Decisions are made without complete information. Relying on bank balances instead of understanding taxes, timing, and obligations leads to false confidence.
2. Emotions drive decisions instead of strategy. Excitement after a great year, fear of commitment, or the relief of paying off debt often override long-term planning.
3. Systems are delayed or avoided altogether. Winging it feels flexible in the short term, but it creates instability over time.
4. Accounting support is reactive, not proactive. When conversations only happen at tax time, there’s no opportunity to prevent problems, only to report them.

None of these patterns mean you’re doing things “wrong.” They mean you’re operating without structure, and most business owners were never taught a structure in the first place.

Once you see these patterns, the individual mistakes become much easier to recognize and far easier to avoid.

How to Stop These Mistakes Before They Cost You More

If you’ve made it this far, there’s a good chance you’ve recognized yourself in at least one of these mistakes.

In the past, paying yourself may have felt uncertain, stressful, or reactive. Decisions were made based on what felt right in the moment, often without clear visibility into the long-term impact.

Now, you have a clearer picture of why those decisions can quietly lead to cash flow problems, tax surprises, and unnecessary stress, even in successful businesses.

The next step is making sure you have the right foundation in place.

If you haven’t already, start with our complete guide to "How to Pay Yourself as a Business Owner." It walks through the mechanics, structures, and considerations that help turn awareness into action.

Once the foundation is set, personalized guidance can make a significant difference. At Patrick Accounting, we help business owners move from reactive compensation decisions to intentional systems that protect cash flow and eliminate surprises.

If you’d like help identifying risks in your current approach and building a strategy that fits your business, schedule a discovery call with our team.

You’ve worked too hard to let preventable mistakes undermine your progress. With the right systems and support, paying yourself doesn’t have to be stressful. It can be strategic.