Many people who own their own businesses pay themselves sporadically, like when a contract is collected. For most business structures, you aren’t required to issue yourself a paycheck from your own company, so there’s no rule that says sporadic payments aren’t allowed. But, there may be a time when drawing a paycheck from your company is beneficial, such as proving your income to a lender or creditor, or balancing your business and personal budgets by drawing regular checks each pay period.
Choose a pay period. Pay periods can run weekly, every other week (biweekly), twice per month (bi-monthly), or monthly.
Select a rate of pay. If you’re creating a paycheck based on a flat amount you pay yourself during the pay period, you can either list the flat amount as salary, or break the amount down into an hourly rate by dividing it by the estimated number of hours you worked during the period. If you’ve assigned an hourly rate instead of a flat rate, multiply the hourly rate by the number of hours you worked. The result is your gross pay.
Calculate your federal income taxes. Calculate your withholding allowances on Form W-4 and look up your income tax withholding on the tables shown in IRS Publication 15-A. Use the Wage Bracket Percentage table and reference the filing status and number of exemptions on your W-4 for the type of pay period you chose.
Calculate your state income taxes. If your state imposes income tax or other mandatory withholdings, like state disability insurance, you’ll calculate amounts to deduct in a manner similar to deducting your federal income tax. Each state publishes income tax withholding tables and lists percentages for other mandatory deductions. Visit the Department of Revenue website for your state and search for withholding tables under the “Business” or “Employer” section.
Calculate your Social Security and Medicare taxes. If your company is a corporation, you are considered an employee of the company. You’ll deduct half your Social Security and Medicare taxes from your pay, and your company pays the other half. As of June 2012, your employee portion of these taxes is 5.65 percent and the company portion is 7.65 percent. Multiply your gross pay by .565. If your company is a sole proprietorship or single-member LLC, your Social Security and Medicare tax is called self-employment tax. The 2012 rate for self-employment is 13.3 percent. These amounts are subject to change, so check the IRS website for details.
Subtract your income taxes and Social Security and Medicare or self-employment tax from your gross pay. The result is your net pay. Write your paycheck for this amount.
Create a pay stub. On a slip of paper, list your gross pay and the category and amount for each tax you calculate and deduct from your pay. Keep the pay stub with your records.
- If you withhold taxes from your pay, you must deposit the taxes with the IRS and state tax agencies. IRS deposits must be made electronically through the EFTPS system. Your state has similar deposit rules, but may not require electronic deposits. Visit the IRS and state websites for more information.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.