All of your life, you’ve probably worked and received a paycheck from someone, else until now: now you’re the boss of your own business. You’re the alpha dog, the head of the pack, and you now have people report to you (or maybe it’s just you!).

But, wait — it’s the end of the month, and, hold on a second just what is your pay? You’ve put so much work into your business, and that is a value in and of itself, yet how do you determine your reasonable monetary worth?

No magic formula is going to conjure up the exact amount you should be paid, but conversely, at least you don’t have to have awkward pay raise talks. How much you will make is dependent on multiple interloping factors. Below are five tips to help you ascertain the number on your pay stub.

1. What Type of Business Do You Have?

Industry type is the best place to start when doing the calculation for your salary because each business will have different implications. For example, if you are a sole proprietor that means that you and your business are equal in a legal perspective — you can take out as much as you want but you are also personally liable for your company. In contrast, if you have to set-up an incorporated business you are legally obligated to be on the payroll.

Need help determining your business type?

You can check out this helpful article from the Small Business Administration (SBA), which explains each category of business thoroughly. Additionally, you should schedule time with your accountant to walk you through each type and conclude which is best for you — should you need to find an accountant, QuickBooks can hook you up with someone.

2. Figure Out the Best Payment Method

What method do you want to use to pay for yourself?

The way you choose will result from factors such as how long you have been open, entity, and your business plan. For your considerations, there are two primary ways you can pay yourself:

Your first option is called an owner’s draw, and it’s the way that most small businesses choose to get paid. The IRS views entity owners such as LLCs and sole proprieties as self-employed, this means that you do not need to be on the paycheck.

At first, your pay may seem larger than anticipated and that is because taxes are not taken out and the time in which you pay yourself. Before you do a victory dance, this seeming gain is momentary as they will be taxed as a part of your individual return.

The second way you can pay yourself is with a salary. Salaries are “set, recurring payments that are taxed by the state and federal governments”. What are some instances where you may have to take a salary and not an owner’s draw? If you own a corporation and are involved in everyday happenings, then you must take a salary.

Whichever way you choose, you will eventually have to pay a tax on it, whether it is now or later. One way to make this task easier is by using an online payroll solution which will do all the mental work for you.

3. Select an Amount

Unfortunately, choosing your pay is not only selecting a number that sounds nice — it must also be an amount that will allow your business to flourish in the long-term.

Do you know about profit and loss (P&L) statements? P&L allows you to see your net profit, which is total profit across the board, for each month. You might think that you would subtract your pay from the total revenue, but you need to deduct it from your net profit.

Why?

This is necessary because if you take your pay from the total revenue, then you are not accounting for your business expenses such as your rent, employee pay, and other things that are necessary to your business functioning.

Be careful not to inflate your value — although you are a pretty awesome person for starting your own company, the IRS requires that your compensation be “reasonable”. In this context, “reasonable” is being paid the same amount if you worked a similar role elsewhere.

If you’re like a lot of small business owners, you probably take on a multitude of tasks. In this case, it is best to determine your pay for the duties you do the most — this is called your “true wage”. You can then base your pay off of how much you would pay someone in a similar role.

Not sure on what a typical employee would make? You can check out the Income Statistics guide from the SBA to get a better understanding of the numbers.

4. Pick a Payroll Schedule

How often do you want to pay yourself?

You can do weekly, bi-weekly, or monthly payroll time periods — but if you want a better idea of what would be best for your small business, you can check out this article by Gusto here.

It is also good to keep in mind that most states require that you follow a payment schedule. If you do not know the minimum salary pay interval requirements in your state, then look at this chart, courtesy of the Department of Labor.

5. Get Your Paycheck

You’re almost there! Now is the payoff (literally) for all your work, and you deserve it!

There are two options here: either pay yourself with direct deposit or write yourself a check.

At the end of the day, money isn’t the most important incentive for your business: it is watching your idea come to fruition. Compensation is the result of your idea taking shape, and you should feel proud of your accomplishment.


Need more ideas on how to make paying yourself even easier? Automating your accounting processes with software can be an easy and economical choice — for that, CUE has researched and curated some of the best solutions out there for your small business. Why wait? Check out our marketplace here, and start freeing up your time today.

Today’s content was derived from FreshBooks article on “How To Pay Yourself When You Are the Boss.”