3 Factors to Consider While Determining Your Own Paycheck When Self-Employed

You finally did it, you started your own business! That is truly a marvelous achievement to accomplish. However, as you are finding out, payroll can be complicated. At what point do you start paying yourself? How much should you pay yourself and how much should be reinvested back into the business? These are a few of the many questions you might have as your business begins to grow. To help answer them, you need to formulate a strict plan to determine three things: how much to charge customers for your services, what your paycheck should be, and exactly how you’re going to pay yourself. Once you’ve worked out those three things, payroll should be a bit more simplified. Continue reading to delve into the guide for cutting yourself a paycheck when you’re self-employed.

How Much Should You Charge Your Customers

Determining how much you should charge your customers can be challenging. You do not want to charge too much because then it’ll be less likely someone will want to hire you. If you charge too little, sure you may be getting a lot of business, but you’re more likely to run your business to the ground because it costs more to do the service than what it is earning. Be careful about under-charging. If you’re new, you might think charging a lower price than your competition is a beneficial strategy to gain more business. Sometimes that can backfire by having your targeted customers think you’re not as good as the competition because of the cheap pricing. This is where market research comes in handy. Research what other businesses in your line of work are charging and calculate the median number. If your business offers a service others don’t provide or even improves upon one, consider that as well. If your listed price is not generating enough traffic, don’t be afraid to adjust accordingly. You’re a new self-employed small business and chances are you will have to test a few things out.

Do Not Lowball Yourself

Know your worth. Analyze all financials that your business has earned before you write your first check to yourself to determine how much is fair. Look at how much you charge your customers, how many customers you’ve had, the potential return rate, how your skillset sets you apart from the rest, the cost of running your business, and how much time you have invested. The key is keeping track of how much time you invest per project/service. What a lot of self-employed business owners do is forget to log their hours. Calculate a fair pay rate for yourself to help give you a guideline on how much you should be compensated.

How to Pay Yourself: Owner’s Draw vs. Salary

There are two methods of payment that are widely accepted among the self-employed: The Owner’s Draw Method and The Standard Salary.

The Owner’s Draw:

• Draw money from your business earnings as you think is appropriate.
• You don’t have a fixed income because you can influence how much you draw depending on your business performance.
• You can draw as much money as you want and as frequently as you want—if there is money left in the business account.
• Taxes aren’t automatically deducted as you must be ready to do a self-report and pay total taxes during taxation time.
• Requires a lot of personal tax planning leading to a lot of extra work come tax season.
• Make sure that your payments are somewhat equal and withdrawal intervals are regular.

The Standard Salary

Figure out a fair salary to consistently pay yourself by taking into consideration the previous two sections. Whether that is weekly, bi-weekly, or monthly, that is up to you. Like most salaries, this benefits you by keeping track of your taxes owed so you don’t have to scramble to figure that out when tax season arrives. This allows for more consistency when it comes to balancing your business payroll financials by keeping track of cash flow. Which style of payroll is ultimately up to you as you are your own boss!

Quick Tips for Your Paycheck

Although there are many factors to consider, here are some quick and easy tips to follow to help make your life easier:

1. Make your business account separate from your personal account
2. Utilize payroll software to generate custom paystubs and record payments
3. Ensure you always have enough cash to allow your business to run smoothly
4. Do NOT delay tax payments so they don’t stack up

A quick tip to determine how much to pay yourself is to typically aim somewhere around 50% of your earnings. This can fluctuate, but it is a good rule to operate by.