The United States is well known for its entrepreneurial spirit. With so many small business ideas to choose from, there’s something for everyone. In fact, the US Small Business Administration (SBA) reports that 30.2 million small businesses make up 99.9% of all businesses in the country. But is owning a small business worth it?
How much do business owners make? Unfortunately, there’s no clear cut answer, since the earning potential varies depending on the industry, type of business, size of the business, and other factors. However, business owners are more in control of their salary than the average employee, since they can set their own. Here’s how to figure out what you should make when starting a new business.
How Much Small Business Owners Make
According to PayScale, the average small business owner earns $60,378 a year, with a salary range of $27,000 to $150,000. SBA data shows the median income for individuals self-employed at their own incorporated business was $50,347 in 2016, and for those self-employed at their own unincorporated businesses, the figure is $23,060.
Going beyond the business type and industry, your experience level and cost of living in your area are two of the major factors that dictate your salary. The longer you’ve been in business and the more experience you have doing the work, the more you’ll be able to charge. Opening a business in New York City or Los Angeles where the cost of living – and doing business – will cost far more than opening a business in Oklahoma City, where expenses are much lower.
The wage gap affects small business owners across most industries. On average, women earn 80 cents for every dollar men make, so women who own businesses earn an average salary of $47,200.
An often overlooked factor is business expenses. While no business owner wants to struggle financially, it’s not possible to keep every dollar the business brings in. If there are employees, they must be paid before the owner can take their payment – or there won’t be people to keep the business running.
How to Figure Your Salary
When it comes to how much you should pay yourself as a small business owner, first consider your bottom line. Calculate your living expenses per month, and multiply by 12. If you need $3,500/month to pay your rent or mortgage, car payment, utilities, insurance, and groceries, then you know you cannot take less than $42,000 a year as your annual income.
Next, consider your compensation options. While a flat salary is ideal for accounting purposes since your payments are clear on the books, you also have the option to take a salary plus commission, so you can make a little extra money when business is going well, or pay yourself with stock options.
Once you have that bottom dollar, it’s time to figure out if your business can afford to pay you that much. If your business isn’t earning enough to cover your salary, then you can’t take it. If you’re not turning a profit, you may not be able to afford to pay yourself much, if anything at all.
Now, think about what a similar job would pay you, factoring in your skills and experience. How much money could you earn working for another company in the same industry? Trade magazines and organizations can be helpful to determine the salaries of competing business owners.
You can use the bottom dollar salary to help you determine the hourly rate you should be charging clients – or the prices you should charge for packages or services.
Taking that $42,000 annual salary, and adding $20,000 for business expenses, taxes, and profit, to put back into the business, you’ll need $62,000 a year in gross income, or $1192.30 a week. If you want to work a standard 40-hour week and take two weeks off a year for vacation, you’ll need to earn $31/hr to pay your salary and have enough money for your expenses. You’ll need to charge more than that to ensure you’re earning a net profit. It’s up to you whether to take the company’s profits and reinvest into the business.
It may be tempting not to pay yourself because you’d rather invest the money back in your business, but that’s not a good idea. If you’re paying your bills from savings, the money will eventually run out. If you never draw a paycheck from your business, you won’t get an accurate picture of what it costs to run your business, and because you’ll eventually want to be paid, it may be hard to start paying yourself and keep the business going.
Tax & Legal Information For Small Business Owners
All that said, the requirements for paying yourself as a business owner vary based on your business’ legal structure.
If you’re operating as a sole proprietor, then you won’t be an employee, and you won’t receive a paycheck or be subject to automatic withholding. You’ll be responsible for paying self-employed taxes and will take your pay from a distribution of your business profit. Everything is handled on your personal income tax filing with an additional form, known as a Schedule C, that addresses business revenue.
If you’re in a partnership, your yearly salary comes from the business profits, but the amount of money and how it is distributed is determined by the language in the partnership or LLC operating agreement. LLC owners, or members, are not employees and will not receive a salary. They are treated as sole proprietors for tax purposes unless the LLC elects to be taxed like a corporation. Multiple-member LLCs are treated as partners in a partnership.
If you own a C-corporation or an S-corporation, you are a shareholder, and if you work as a corporate office, you are entitled to your own salary, with the necessary employment tax deductions.
Regardless of business structure, you’ll still pay taxes on the income you earn – and the income the business earns. The difference lies in the forms used to report it and how the taxes are calculated.
It’s worth noting the IRS requires business owners pay themselves a “reasonable salary” which means you’ll pay yourself what you would be paid working in a similar role for another business. Paying yourself an unusually high salary for your industry or overall business revenue could trigger an IRS audit.
You’ll be able to deduct business expenses, such as hourly wages paid to employees or independent contractors, car expenses if used for business purposes, capital equipment expenses, and more.
More than likely, you’ll be required to make estimated quarterly tax payments. At the end of the year when you file your return you report your actual income. If you overpaid your quarterly taxes, then you’ll get a refund.
How To Grow Your Salary By Being More Profitable
Maximizing your profits requires strategies that include minimizing costs and pricing that is both profitable and competitive. Small businesses often have trouble competing with bigger businesses on price, and rely on other strategies to grow their business. Here are three ways to up profits – and increase your salary:
1. Increase in Sales
Small businesses often have an advantage over big chains. They can offer fast, personal response big businesses can’t match, and follow-up every lead. Lightning fast response is often the key to a sale. A website with a chat feature enabled allows you to offer help at the exact moment customers need it – and gives you the advantage of instant, personal response.
2. Generate Word-of-Mouth (WOM)
For small businesses, reputation is everything. You can grow your brand and ensure your reviews remain positive by:
- Monitoring your online reputation. Respond to comments quickly, and be gracious to complainers. Take complaints to a private conversation as quickly as possible to resolve the situation, and when it is resolved, ask the customer to update their comments.
- Asking for customer reviews. Reviews are absolutely invaluable and work to improve your SEO, and that helps your business rank higher when customers search for businesses like yours.
- Promoting your business on social media helps spread the word.
3. Decrease Expenses
The less you spend, the more you profit. While you may not be able to take full advantage of volume discounts, you can shop around, buy smart, and understand data, so you stock only what customers want to buy.
Small business owners often struggle to figure out how much they should pay themselves. If you pay yourself what you’re really worth, you may stifle business growth. It’s important to find balance and pay yourself a living wage your business can support, without cheating customers, product, or employees.
After you’ve determined your salary, you’ll want to examine it again from time to time, to make sure you’re on track to earn what you need. As your business grows, you will naturally make adjustments; increasing rates for customers, amping up marketing to grow your customer base, looking for ways to reduce business expenses or a combination of those actions. Increasing revenue for the business means increasing your own income!