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 (S corporation, C corporation, single-member LLC, sole proprietorship, etc.) 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 pass-through entities—owners of Limited Liability Companies (LLCs), sole proprietors, 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 an amount you can withdraw from your business bank account or personal account whenever you like.
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 a reasonable salary, 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.
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 employers have reasonable compensation, 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.
Pro tip: Don’t be afraid to contact a tax professional, like a CPA, for guidance on setting a salary that makes sense with your expenses and revenue.
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.
FAQs
How much should I pay myself from my business / LLC?
Unfortunately, there’s no set number for how much you should pay yourself as a business owner. How much money you allocate for yourself depends completely on your type of business, business finances, business goals, and personal finances. You need to deduct your business expenses from your company’s profits, set aside 30% for taxes (e.g., payroll taxes or self-employment taxes), and make sure you can afford your area’s cost of living. A good rule of thumb, though, is to set aside 30% of your net income for your salary.
When is it appropriate for a business owner to start paying themselves from business profits?
You can start paying yourself from your business profits as soon as you feel comfortable with your business’s revenue and sales projections. For certain businesses, that could take a couple of months; for others, it might take close to a year. In general, if you’re able to, it’s a good idea to start off paying yourself less than you’d ideally like to make—use the money you would give yourself to invest back into your business.
How often can a business owner pay themselves (weekly, biweekly, or monthly)?
You can choose any pay frequency you like: weekly, biweekly, or monthly. Just make sure it’s consistent! Consistency makes record-keeping, bookkeeping, and budget planning easier.
What records or documentation must a business owner keep when paying themselves?
As a business owner paying yourself, you should keep copies of your bank statements, personal tax returns, business transactions, payroll records, and any checks or deposit slips.
How does paying yourself affect business cash flow and budgeting?
Paying yourself as a business owner affects cash flow and budgeting the same way covering an employee’s salary or paying any business expense does. It’s part of the holistic cost of running your business, so you have to factor it in accordingly. That said, many business owners who are just getting their operations off the ground (as well as experienced entrepreneurs with flexible capital) choose to take a more modest salary so they can invest funds back into growing the business and keeping it viable and profitable long-term.
Can a business owner change their compensation method later (e.g., from draws to salary)?
Yes, you can change your compensation method as a business owner, but you need to look into the logistical and legal ramifications first, since the exact process depends on your business entity and what the IRS requires. If, for example, you’re changing from an owner’s draw to a salary, you likely need to change your business structure or tax status first.
How to use Gusto to pay yourself
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 automates payroll and taxes, so you stay compliant and have more time to focus on growing your operation. Learn more about our payroll services.
How do I get set up on Gusto?
You can get set up on Gusto in just a few clicks by signing up for a plan. If you’re setting up payroll for the first time, start here with our comprehensive list of everything you need to know. If you need help switching from your current payroll provider to a Gusto plan, check out our simple 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?
Learn about our flexible pricing and offerings here.
