“How much should I pay myself?” is one of the most common questions I get as a coach. It is rarely just a math question. A lot of feeling can be tied up in it: maybe excitement about what the firm makes possible, fear of taking too much, or even shame about earning more than the team.
Ultimately, the goal is two things at once: you are paid fairly for the work you do in your firm, and the firm earns a return for you as its owner. When both are true, you could replace yourself as the worker bee and still keep the financial benefits of owning the firm.
Put another way, there are two numbers to set on purpose. The first is pay for your work: what it would cost to hire someone to do the work you do in your firm, priced by the hours you spend (or the share of a full-time position, called FTE) at a market rate for that work. The second is a target for what the firm should earn on top of that, as your return on owning it. Most firms set neither, so both end up being whatever the month leaves behind. This article is mostly about the first number, and about how to see the second.
If your firm is an S corporation, the same idea applies. The IRS expects you to be paid reasonable compensation for the work you do, and what counts as reasonable is a judgment that depends on your role, your hours, and your market. Set it with your CPA, not by a rule of thumb.
This article walks through the different jobs you do in your firm, the different ways owner pay is delivered (draws, W-2 wages, distributions, and more), what to consider when you set your number, and why that number changes what you think your firm earns. At the end is a free calculator for your own numbers.
The jobs you do in your firm
As an owner you hold three jobs at once, and each one is worth something different. Pricing them separately is what makes the rest of this article work. Here, “wage” means what your work is worth, however you are actually paid: a W-2 salary or draws. Price each job by the hours a week you spend on it (or the share of a full-time position, FTE, it takes) times the market rate for that work. Your lawyer hours and management hours should add up to the hours you actually work, not to a full-time position for each.
| Job | What you do | How it should be paid | Question to ask |
|---|---|---|---|
| Lawyer | Client work: advising, drafting, appearing, supervising | A portion of your wage calculation, based on the hours you spend on this work and the market rate for a lawyer with your experience | What would I pay someone to do the work I bill? |
| Manager | Running the firm: hiring, money, systems, marketing, handling the problems nobody else catches | A portion of your wage calculation, based on the hours you spend on this work and the market rate for a firm administrator or operations leader | What would I pay someone to run the firm day to day? |
| Owner | Putting in capital, taking the risk, making the long-term decisions | A return, measured after the first two jobs are paid, and compared with a target you set in advance | Is the firm earning my target return? |
The first two are pay for work. The third is a return on ownership. A wage should not depend on how a good or bad quarter turned out, and a return will. When all three arrive as one lump called “what I took home,” you cannot tell whether the firm is paying you for your work, rewarding you for owning it, or doing neither.
Most owners also do a fourth, unnamed job: the tasks that have not been given to anyone yet. If the firm is small, much of the manager's wage is for that work. It is real work, even though it does not show up on a timesheet.
How owners get paid, and why the label matters
How you get paid depends mostly on how your firm is taxed, and the label on the money changes how it shows up on your books. If your firm is taxed as a corporation, owners who work in it can be paid W-2 wages even when everyone calls them partners. The words get mixed up, so here is what each one means in plain language:
- Salary or W-2 wages: Pay for work, run through payroll, with payroll taxes withheld. Only an employee can receive it, so a sole proprietor usually does not pay themselves wages.
- Draw: Money you move from the firm to yourself. It is a transfer of money you already own, not a cost of the firm.
- Distribution: A payout of profit to an owner. In an S corporation, it comes on top of your W-2 salary, and it is not wages.
- Benefits: Health insurance, retirement contributions, and similar items. They are part of what the firm pays for your work, even when they do not look like pay.
The label matters for a practical reason. If your pay is a W-2 salary, it is already inside your firm's expenses, so profit is measured after your work is paid. If your pay is a draw, nothing has been deducted, so what looks like profit includes your own wage. That is why two firms with identical results can show very different profit. The 5 Financial KPIs Every Law Firm Owner Should Track covers where each of these shows up on your numbers.
Why so many owners undervalue their own time
Undervaluing your time is a habit many owners fall into when they first start a firm and it is not yet making much money. It is not a flaw in you. It often outlasts the early months. A few patterns are common.
- The firm started on your unpaid hours. In the early months, there was no money for a wage, so you worked without one. The habit stayed after the reason went away.
- Pay is whatever is left. You pay payroll, rent, and vendors first, and your own pay comes last. The result is a pay level set by the firm's worst month.
- Only billable hours feel like work. The hours you spend hiring, fixing systems, chasing collections, and deciding things do not appear on an invoice, so they are easy to treat as free.
- Paying yourself more feels like taking from the team. It can feel easier to give a raise to someone else than to approve a wage for yourself.
The cost is real. If you treat your time as free, your fees can end up too low, a hire can look unaffordable when it is not, and the firm can seem healthier than it is. Pricing your time does not mean you must take that amount out of the firm this year. It means you can see what the firm actually costs to run.
What to consider when you set your pay
There is no formula that gives the right amount, but these questions get you to a number you can defend.
- Which jobs do you actually do, and for how many hours a week? Track a typical week. Lawyer hours, manager hours, and the unassigned tasks all count.
- What would it cost to replace you in each job? Start with your hours. Estimate the hours per week you spend in each job, or the share of a full-time position (FTE) each one takes, and price only that time at a market rate. Your lawyer work and management work together should add up to the hours you actually work, not to a full-time position for each. Then add benefits and the employer's share of payroll taxes, because a hire costs more than the wage.
- What does your household need? Your pay is also how you live. A fair wage that does not cover your life is not working.
- What return should the firm earn on top of your pay? Choose a target before you look at the result. Reserves, debt payments, and growth are paid out of that return, and taxes apply to it. Your CPA can help you choose a number that fits.
- How steady is your income? If revenue swings, consider paying yourself a set amount on a schedule and reviewing it at regular intervals, instead of taking whatever is left.
- Can the firm afford it? The money has to actually be there. Compare what you plan to pay yourself, plus your target return, with the cash the firm has after its other costs. If it is not there, that is a reason to look deeper at the firm's operations, structure, and demand, not a reason to ignore the number.
- When will you look at it again? Pick a date. Revisit your pay when revenue, headcount, or your role changes.
For a market wage for each role, see where to find market-rate pay in the sources at the end of this article.
The true cost of running your firm
The true cost of your firm is what it costs to run when everyone doing the work is paid a fair price, including you. Your firm's profit is only meaningful after that cost is covered. Business valuators and accountants have a name for the same idea in any small business: they adjust, or “normalize,” earnings when an owner's pay is above or below what the market would charge for the work.
Here is an illustrative example. The numbers are invented to show the idea. They are not benchmarks, and your firm's will differ. In it, the owner works about 52 hours a week and priced only those hours: 28 on client work and 24 on running the firm, not a full-time salary for each. The hourly rates are invented too.
| Illustrative amount | |
|---|---|
| Revenue | $600,000 |
| Firm expenses, not counting any pay to you | $320,000 |
| Reported profit | $280,000 |
| Cost to replace your lawyer work (28 hours a week × 50 weeks × $100 an hour) | $140,000 |
| Cost to replace your management work (24 hours a week × 50 weeks × $50 an hour) | $60,000 |
| Benefits and employer payroll taxes on those two jobs | $30,000 |
| Profit after paying for your work | $50,000 |
| Return the owner decided the firm should earn | $100,000 |
| Compared with that target | $50,000 short |
| Cash you actually took out as draws | $150,000 |
