When you’re the boss, getting your first paycheck is a big deal. Here’s a step-by-step guide to help you understand how to pay yourself, what to pay yourself, and more.
Fortunately, Gusto makes paying yourself easy. Start setting up your account today.
1. Determine Your Business Type
Your business entity is where it all begins. In fact, it’s the foundation for the entire payroll process, and will help point you to the payment style that’s right for you.
Already know your entity? Bravo, scroll down to the next step.
If not, this overview will help you get a good idea of what options are out there. Before finalizing your decision, remember to schedule some time with your accountant to help explain the ins and outs of each kind.
2. Figure Out the Best Payment Method
Now, think about how you’d actually like to pay yourself.
This part depends on a few factors like your entity type, business plan, and years in operation. There are two main types of payments you should know about.
A. Owner’s Draw
Most small business owners pay themselves through something called an owner’s draw. The IRS views owners of LLCs, sole props, and partnerships as self-employed, and as a result, they aren’t paid through regular wages. That’s where the owner’s draw comes in.
It’s important to note that draws aren’t taxed at the time they’re taken out. However, be prepared to pay taxes on them when you file your individual return.
Which business entity is it suited for? Sole props, LLCs, and partnerships. If you’re an S corp, you’ll also have the option to take a draw in addition to your regular salary.
B. Salary
Salaries are set, recurring payments that are taxed by the state and federal governments. Own a corporation and involved in the day-to-day operations? Then the IRS will expect you to take a salary — not an owner’s draw.
Which business entity is it suited for? C corps and S corps.
Pro tip: Whatever payment style you choose, keep in mind that you will eventually have to pay taxes on that amount, if not immediately, then at some point down the road. It’s really crucial to plan for this ahead of time so you’re not stuck with a giant tax bill when you least expect it. Many payroll solutions will handle this for you automatically, so do your research upfront.
3. Select an Amount
Once you’ve determined the right type, your next job is to calculate how much to give yourself. Wait, I can’t just pick any number? Well, not exactly. You want to pay yourself an amount that ties to your duties, and also sets your business up for long-term success. Here’s a handy guide to help you figure out just how much to pay yourself.Related
Spend some quality time with your profit & loss (P&L) statements to see how much net profit you’re raking in each month. Then, deduct your own pay from that amount — not the total revenue. This is because you want to pay yourself from the amount left over after you tackle your important business expenses, like supplies, rent, paying your incredible team, and everything else needed to keep your venture running smoothly.
The IRS also requires that all employer compensation is considered reasonable, which just means that it should match the amount you’d make if you were working in the same role at another company.
If you feel like you wear a million different hats, try to pick out the most common responsibilities you take on, and then determine how much you would have to pay someone if you outsourced those tasks. This is sometimes referred to as your “true wage,” and it’s truly cool to think about your job in such a multifaceted way.
Take a look at this Income Statistics guide from the Small Business Administration to help you get a quick understanding of what your total should be.
4. Pick a Payroll Schedule
If your business has at least one employee (including yourself!), you need to think about how often you want to pay yourself. In the U.S., the most popular payroll schedules are twice a month, every two weeks, and weekly.
Most states require that you follow a basic calendar, so find where your state falls on this chart from the Department of Labor. The basic rule is that you can always pay yourself more often, but never less than your state’s particular schedule.
5. Get Your Paycheck
Okay, you’re raring toward the finish line: Now it’s time to actually get paid. This is a huge milestone for your business, so use it as a moment to celebrate all you’ve accomplished.
Getting paid can be as easy as writing a check and depositing it into your personal bank account, or even quicker if you go the direct deposit route. Direct deposit simply means that the money is dropped straight into your bank account.
Before picking between the two, make sure you know exactly when you’ll have access to the amount so you can properly plan ahead.
How to use Gusto to pay yourself FAQs
Can I use Gusto to pay myself as a small business owner?
Yes. You can use Gusto to pay any of your employees, even if it’s just you for now. Gusto was made for small business owners and can help you stay compliant, allowing you to focus on the many other tasks you need to do to grow your business. Learn more about our payroll services.
How do I get set up on Gusto?
Gusto is easy to set up, and easy to manage, you can even get started today using our modern intuitive platform. If you’re setting up payroll for the first time, we suggest reading our list of everything you need to know. If you need help switching from your current payroll provider, we suggest rereading our guide to switching. If that doesn’t answer all of your questions, you’ll receive the support our customers rave about on social media.
How much does it cost to pay myself with Gusto?
Gusto costs as low as $55/month, and we’ll never surprise you with hidden fees. With Gusto, you get award-winning payroll that fits your budget and is simple to use. That’s why over
400,000 growing businesses use it to pay millions of employees every month. Plus, when you’re ready to grow, we can help with benefits, 401(k), and more. You can learn more about our flexible pricing and offerings here.
