Anyone who has not been a business owner may idealize the thought of “being an entrepreneur.” It is easy to imagine charismatic CEOs who have it all together and take large salaries home. But if you have been an entrepreneur, you know the reality is just the opposite. A business owner’s life is rarely that simple, especially when it comes to a small business owner’s salary.
Small business owners and entrepreneurs, especially those who are just starting out, can usually find it challenging to figure out exactly how much they should be paying themselves. It is not an easy task. Most do not want to take any money out of the business when it’s still not completely established. On the other hand, they need money to meet personal expenses, and often their business is their only source of income because they went all-in on it.
The average entrepreneur salary in the USA is somewhere between $68,000 and $72,000. It is far higher than the normal income in many industries, but many entrepreneurs do not pay themselves. If you have started your own business but are sitting on the wall about your salary, this article is for you.
What Is the Average Entrepreneur Salary?
If you are thinking about how much to pay yourself as an entrepreneur, you may be questioning what others in your shoes make. Though many small business owners take no salary at all, that does not mean you should sacrifice an entrepreneur salary yourself. An American Express research found that the average entrepreneur salary is just $68,000, down somewhat from the previous year. According to Payscale, that number is closer to $72,000.
Either way, it is obvious most small business owners do it because they love it, not because they want to get rich fast. Anyone who has been an entrepreneur understands it is hard work, often stretching into late nights and weekends. The good news is that as you progress, you can await your entrepreneur salary to rise too.
Why Should You Pay a Salary as an Entrepreneur?
The main reason business owners should pay themselves a fixed salary is to control the amount of money that is withdrawn from the business capital. If you do not specify a set amount as your salary, you will not keep track of your business expense as efficiently.
Furthermore, once you pay yourself a set salary as a business owner, you will be further excited to run the business smoothly while keeping up with self-appreciation. Such indefinite factors is an excellent motivator for small business owners.
Calculating Your Entrepreneur Salary
All the big tech CEOs in the United States get paid a dollar as profit. Do not idealize that thought. You do not have billions in stock options to cash in, and your company is not flush with cash to float your business expenses, at least not yet, so take a more fair approach. You will require to think long and hard to come up with a number that you feel is right for you and does not negatively influence the business’s growth.
If you do determine to pay yourself, then how much should it be? As much as the business can afford or just enough for you to live on? Sadly, there is not a hard and fast rule for determining an appropriate entrepreneur salary. However, there are some factors that you can show up that’ll assist you in landing on a reasonable figure.
Reasonable Compensation:
Ultimately, there is no magical formula or small business owner salary calculator to figure out accurately how much to pay yourself. It is an incredibly business-specific question that depends on a wide number of practical and personal factors.
To come to the correct number, go through this checklist:
Comparable Salary
If you were appointed by someone else to do the job you are doing now, what would your salary be?
Analysis hourly or yearly market value through your industry’s trade association, the SBA’s Income Statistics page, or a salary listing on sites including Glassdoor, Salary.com, or Payscale.
That said, estimating your market value can be complicated if—like many small business owners. So, if getting a matching job description is not working, take a different approach. List out the most common responsibilities you take on, then decide what it would cost you to outsource those tasks to someone else.
That blended number is sometimes called your “true wage.”
The Tax Factor
Depending on your business’s entity type and whether you are getting a salary or draws, there are tax pros and cons to taking a payout versus reinvesting in your company. Make sure you have educated yourself on these pros and cons and plan ahead.
Discuss with a capable accountant—ideally, your business’s own, but a certified public accountant is also acceptable—to find out precisely which tax regulations affect your company and how. An accountant can also assist you in finding ways to make the most of deductions, shareholder distributions, and other tax breaks that will help you determine the cash to pay yourself an entrepreneur salary.
That said, investing some funds back into the company (rather than taking them as compensation) is a different way to minimize tax responsibilities. And down the line, lenders will want to see that you have invested in your business—especially if you are applying for a highly desirable SBA loan.
Tax Considerations
There are also implications of tax for withdrawing an entrepreneur’s salary compared with reinvesting the money into your business. Since these are complicated and differ by a business structure, it is best to get a qualified finance professional’s help. You may find that the tax considerations determine your salary for you since the prices go up at particular cut-off points.
This is a critical element that some small business owners may not know when they are starting out. You will be asked to pay taxes on the money that you pay yourself; it’s treated as personal income, so make sure that you hold on to all documentation and pay the scheduled taxes on time.
You will also need to be mindful of keeping a consistent payout schedule. Random draws from the company could result in a tax audit of your business by the IRS. That can not only be a drain on your business’s cash flow, but it’s also an additional distraction that you can surely do without.
This can often be a lot to figure out on your own. The best strategy here is to take the advice of a qualified tax professional. They will be able to help you assure that you are fully compliant with the tax liabilities. IRS fines are no joke, and it’s always better to spend some money on a professional than paying significantly more in fines if it finds variations in the audit.
Set a Salary as a Percentage of Profits
You will require the help of a business analyst or someone similar to give you a fairly accurate Business forecast. This will allow you to view business growth projections, including revenue projections for the years to come. Once you have the figures down, for example, your projected business costs, taxes, growth plans, expansion, and or merger costs, you can begin to set a baseline for your salary. Most small businesses restrict their salary percentage to 50 percent of profits.
If the business you own has not crossed the start-up stage, you will need just to analysis your personal costs and a few small business overheads to arrive at a number for your salary.
Cash Flow
Cash flow is the critical factor of any business, so it’s essential to consider how drawing a salary will affect it. Are you generating a regular income that enables you to pay yourself a salary? Do your customers pay on time, and would you still be able to pay yourself if an invoice becomes overdue? Do your figures based on the worst-case and the best case so that you will not be caught out in a quiet month.
Remember, ensuring the flow of business is of paramount importance. Do not end up putting yourself in a place where you have to shut your company because of cash flow problems. It will work as a warning to any potential investors, even for your future endeavors, as it indicates mismanagement.
They would not take kindly to knowing that a business owner kept paying themselves too much that they ran out of money to pay their employees and had to shut down. Make sure no blunders are made when you have got your salary determined and project how paying yourself would show on the business’s balance sheet.
Salary or Owner’s Draw Method
There are two main approaches to pay yourself an entrepreneur salary—with a regular salary or through owner’s draws.
Salary Method
The salary method is basically just like getting paid in the workforce at large. You are paid on a regular program, either based on hours worked or at a flat rate.
In fact, if you are an officer of a C-corporation or the owner of an S-Corporation, you are legally needed to get a regular salary with withholdings for Social Security, Medicare, and federal and state income taxes.
Owner’s Draw Method
An owner’s draw is a withdrawal from your company’s profits—profits, not revenues—payable to you, the owner. Ensure that you are accounting for all expenses (rent, utilities, employee salaries and benefits, supplies, equipment needs, and all the rest) when you determine how much you can safely afford to take out of your business for your own pocket and when.
This means you require to know your company’s profit and loss statements inside and out before making this decision.
Draws are not subject to withholding for Medicare, Social Security, or income tax when they are paid out—but remember that you will still have to report that income and pay equivalent taxes on it at the end of the year. If you take draws, keep clean records, and consistently set aside money for taxes, you are not caught shocked on Tax Day. Your small business accounting software can also automate this process for you.
Sole proprietors, partners, and owners of LLCs are not directed to the equivalent rules as corporations. What’s left over after deducting expenses on Form 1040 Schedule C (for sole proprietorships) or Form 1065 (for partnerships) is profit and viewed by the IRS as the owner’s personal income.
Essentially, these business owners are self-employed: as such, they can pay themselves however they want, draw, or salary. S-corp owners can also take a draw on top of their salary.
Final Thoughts
The salary of a business owner is utterly contingent upon the growth potential of the business. If you are sure of the said enterprise’s growth, you are better off investing in the business and waiting out a slow market period to rise a market leader according to your business’s reach.
