Salaries are usually the biggest line in an SBIR budget. Getting payroll set up right from day one makes drawdowns easier, keeps you within budget, and saves a lot of cleanup if you're ever audited. Here's what to plan for.
1. Put your team on payroll
Pay people as W-2 employees, founders included. Grant-funded salary needs a payroll record behind it.
Your PI has to be primarily employed by your company. For SBIR that means more than half their working time, for the full award. A PI with a full-time job elsewhere doesn't qualify.
Contractors are fine for specific work, but they're budgeted as consultants or contractual costs, not salary.
2. Know the difference: direct labor, salary and total compensation
These three numbers get mixed up a lot, and they show up in different places in your budget.
Total compensation is everything the person costs you: salary plus fringe (employer payroll taxes, health insurance, retirement contributions).
Actual salary is the gross pay on payroll. Timesheets split it into three parts:
Direct salary: time spent on the funded project
Indirect salary: time spent running the company, like G&A
Unallowable salary: time the government won't pay for, like fundraising and proposal writing (B&P)
Direct labor is just the direct part. It's the salary line you charge to the award.
Example: Sam earns $120,000 a year and logs 60% to the project, 30% to G&A and 10% to B&P. Fringe runs 25% of salary.
Total compensation: $150,000 ($120,000 salary + $30,000 fringe)
Actual salary: $120,000
Direct salary: $72,000
Indirect salary: $36,000
Unallowable salary: $12,000
Direct labor charged to the award: $72,000
How each piece gets paid for:
Direct labor is billed to the award directly.
Fringe is added on top as a percentage of salary.
Indirect salary is recovered through your indirect rate, not billed as labor.
Unallowable salary is never charged to the award. It's paid from other funds.
Holiday, PTO and sick pay are part of salary, but they're logged as their own jobs and treated as fringe, not direct labor.
When your proposal budget lists a salary for someone, check which number it means. The personnel line is direct labor. It should never be their full salary unless they spend 100% of their working time on the project.
3. Set salaries that match your budget
Start from the rates in your proposal. Your approved budget is built on each person's salary rate and effort. Payroll should match.
Keep pay reasonable and consistent. Pay what you'd pay for the same work if there were no grant. Don't raise salaries just because the grant is paying.
Know the NIH salary cap. NIH won't pay a salary rate above the Executive Level II rate, $228,000 a year as of January 2026. The cap applies to the full-time annual rate, not just the direct portion. You can pay someone more, but the extra comes from non-grant funds.
Changing someone's salary mid-award? Document the reason, and check whether it moves enough money to need approval. See How to re-budget your SBIR or STTR award.
4. Charge only the time spent on the project
Timesheets decide how much of each person's salary is direct labor.
Someone who spends 60% of their time on the project charges 60% of their salary to the award as direct labor.
Your PI needs to put in real effort. NSF Phase II, for example, requires at least 1 month of PI effort for every 6 months of the award.
Founders log time too, every day.
See the DCAA-Compliant Timesheet Guide to set this up.
5. Budget for fringe benefits
Employer payroll taxes, health insurance, retirement contributions and paid time off all count as fringe. They're usually charged to the award as a percentage of salary. Make sure:
Your fringe rate in the budget reflects what you actually pay
Benefits follow a written policy that applies to everyone, not just grant-funded staff
Holiday, PTO and sick time are logged on timesheets
6. Match payroll to your timesheets
Run payroll on the same schedule as your timesheet periods. We recommend semi-monthly payroll for most SBIR teams. It lines up cleanly with monthly reporting. See the Gusto Setup Guide for how we set this up.
7. Plan your cash flow
Payroll goes out before you're reimbursed. Plan for the gap:
Keep enough cash for at least one or two payroll cycles before your first drawdown.
Draw down regularly, usually monthly, so the gap doesn't grow.
Remember you pay total compensation, but only direct labor, fringe on it and your indirect rate come back from the award. Unallowable salary is always on you.
Starting before the award date? NSF and NIH generally allow pre-award costs up to 90 days before the start date, at your own risk. Log that time to the project and tell us so we can confirm it's allowable.
8. Plan for the end of the award
When the award ends, or if there's a gap between Phase I and Phase II, grant-funded salaries need another source. Decide early whether you'll bridge with other funding, reduce hours, or pause roles. Grant funds can't cover salary after the award end date.
Templates
We've put together sample templates you can copy and adapt, including an employee offer letter. Open the template folder.
Make a copy before editing, and have your own counsel review anything you send to employees.
Checklist
Everyone on the award, including founders and the PI, is on W-2 payroll
The PI is primarily employed by your company
Your budget uses direct labor, not full salary, on the personnel line
Salaries match the approved budget and are documented
Timesheets are set up and match payroll periods
Fringe rate reflects real costs and follows a written policy
You have cash for at least one or two payroll cycles
Questions about your setup? Message us and we'll review your payroll against your award.