“What should I pay myself?” is one of the first questions I get from HVAC owners once the business gets past a few million in revenue. Most of them already pay themselves something. The question underneath is whether the number is right, and right means three different things: right for your CPA, right for your cash, and right for the day you sell.
Here is how I think about it as a CFO. The tax side is your CPA’s call, and I will point out where that line is. Everything else is a business decision, and most owners make it by feel.
How much do HVAC business owners make?
Total owner pay has two parts. There is the W-2 salary you run through payroll, and there are the distributions you take out of profit. Most salary numbers you find online quote a single average and miss that split. In a profitable shop, the split is where most of the money is.
The salary piece is fairly predictable. For an S corp owner, I typically see a W-2 salary between $60,000 and $120,000, and $80,000 is probably the most common number. That range is most common for companies in the $3 million to $10 million range, and even there, $80,000 can be on the low side once you get above about $5 million. It depends on the size of the business and what you are doing day to day. The distribution piece is whatever the business earns and can spare, so it moves with revenue, margin and cash.
Say an HVAC company does $6 million in revenue and keeps 8 percent at the bottom line after the owner’s salary. That is $480,000 of profit. Some of it goes to taxes, some to debt payments and some stays in the bank as a reserve. What is left can come out as distributions. Add that to an $80,000 salary and the owner’s total pay looks nothing like the salary alone.
So the better question is not what HVAC owners make on average. It is what your business can pay you, and how that pay should be split.
The S corp question: salary vs distributions
Most of the owners I work with run their companies as S corps. In an S corp, an owner who works in the business is expected to take a reasonable salary through payroll before taking distributions. Distributions are not subject to payroll taxes, which is why owners are tempted to keep the salary low.
How low is a judgment call, and it depends on your CPA: what they want to advise and what they are comfortable with. I do not do tax work, so I do not set this number for clients. My job is to make sure the owner and the CPA are looking at the same numbers when they set it.
The theory is that your salary should equal what it would take to replace your managerial role at fair market value. Not you. Nobody replaces the owner. The role: the person who would run operations, manage the team and keep the place moving if you stepped back.
If you went out and hired a manager-level person to do that job, it would probably cost you $80,000 to $100,000. That is where the common $80,000 salary comes from for a shop in the $3 million to $10 million range. It is open to interpretation, because the line between owner and manager is never clean.
A few things push the number up or down:
- Geography. A manager costs more in Dallas or Miami than in a smaller North Carolina market, so a reasonable salary does too.
- Company size. The manager role at a $12 million shop with three departments is a bigger job than at a $3 million shop.
- What you do day to day. If you run service, sell replacements and approve every bill, you are filling more than one seat.
- Your CPA’s comfort level. Two good CPAs can land on different numbers for the same owner.
Why a low salary makes your margins look better than they are
This is the part that rarely comes up in the tax conversation. Your salary is a cost of running the business. When it is set low for tax reasons, your P&L shows more profit than the business would make if you paid someone else to do your job.
That matters when you compare yourself to benchmarks. If your net margin looks healthy, check what it would be with a market-rate manager on the payroll. I walk through what good HVAC profit margins look like, and the comparison only means something if a market-rate salary is in your overhead. Mark Paup makes the same point about knowing your numbers in the big five numbers every trades owner should track.
It also matters when you decide whether you can afford to step back. If the business only works because you are doing a $100,000 job for $60,000, the first manager you hire comes straight out of profit. That handoff is one of the stages in the $3M to $15M scaling breakdown.
How owner pay changes what a buyer will pay
When you sell, a buyer rebuilds your profit as if a hired manager were running the company. That adjustment cuts both ways: It is one of several adjustments a broker will walk you through long before a buyer sees the file.
- If you pay yourself well above market, the buyer adds the excess back to earnings. That helps your valuation.
- If you pay yourself below market, the buyer subtracts the gap, because they will have to pay someone to do your job. That lowers the earnings they put a multiple on.
Either way, the buyer is going to normalize your salary, so know where your number sits before they do. I cover add-backs in how to value an HVAC business. On the podcast, Ryan Williams explained why EBITDA disappears after you buy a trade business, and owner pay adjustments are a big part of that story.
If a sale is a few years out, a clean owner pay history makes due diligence easier. Lou Hobaica talks through profit, apprenticeships and exit strategy, and I keep a list of tools and templates for selling an HVAC business.
How to set your pay from the numbers
Salary is the easy half. Distributions are where owners get into trouble, because profit on the P&L is not the same as cash in the bank. I have watched owners take a big distribution off a good-looking year and then scramble to make payroll in the shoulder season. If that sounds familiar, read why an HVAC company can be profitable but out of cash.
Before you take a distribution, I want to see four things:
- The month closed on accrual, so the profit number is right. Here is the month-end close checklist I use.
- Your cash reserve covered. I cover how much cash an HVAC company should keep in the bank separately.
- Debt payments and next quarter’s estimated taxes set aside. Your CPA gives you the tax number.
- A 13-week cash flow forecast that shows the seasonal dip before you hit it.
What is left after that can come out. I like owners to take distributions on a schedule, quarterly and after the close, instead of pulling cash whenever the account looks full. That one habit fixes a lot of cash problems. Stephanie Allen covered why home service companies run out of cash on the podcast, and owner draws are part of it.
If you want to share profit beyond yourself, Dustin Marx runs a plumbing company that shares 50 percent of its profits. It is a different model, with the same starting point: you have to know what the profit is.
Plumbing and electrical business owner salary
The same logic applies if you own a plumbing or electrical company, or a multi-trade shop that does two or three of them. The S corp salary range is about the same, because it is based on the cost of a manager, not on the trade. What changes is the distribution side. Margins, seasonality and how much cash the work ties up differ by trade, so what the business can safely pay out differs too.
In a multi-trade company, look at profit by department before you decide what you can take. One strong department can carry a weak one, and the company total will hide it.
Questions owners ask
How much should an HVAC business owner pay themselves?
For an S corp owner in a $3 million to $10 million company, a W-2 salary of $60,000 to $120,000 is typical, and $80,000 is probably the most common. Larger companies, and owners carrying more of the load, usually justify more. Total pay also includes distributions, which depend on how much profit and cash are left after your reserve, debt payments and taxes are covered. Your CPA sets the salary. The distribution decision should come from your numbers.
What is a reasonable salary for an S corp HVAC owner?
The theory is that it should roughly equal what it would cost to replace your managerial role at fair market value. Not you as the owner, the manager role. A manager-level hire often costs $80,000 to $100,000, adjusted for geography and the size of the company. Your CPA makes the final call on what they are comfortable with.
Should I pay myself salary or distributions?
Both, if you run an S corp and work in the business. The salary covers the job you do and runs through payroll. Distributions come out of profit after the business has what it needs. Keeping the salary reasonable and taking distributions on a schedule, after the month is closed, keeps both your CPA and your cash flow happy.
Does my salary affect what my HVAC business is worth?
Yes. A buyer rebuilds your earnings as if a hired manager ran the company. If you pay yourself above market, the excess gets added back and your earnings go up. If you pay yourself below market, the buyer subtracts the gap, because they will have to pay someone to do your job, and your earnings go down.
Is a plumbing business owner salary different from HVAC?
The salary range is about the same, because it is based on the cost of a manager, not on the trade. What differs is the distribution side. Margins, seasonality and how much cash the work ties up vary by trade, so what the business can safely pay out varies too.
If you are not sure your pay is set from numbers you trust, book a free intro call.
