The Entrepreneur Salary W W W. ACCO UN T IN G A ND R EFUND S .CO M
WHAT IS YOUR AVERAGE SALARY AS AN ENTREPRENEUR? When thinking about how much you should pay yourself as an entrepreneur, you may be wondering what others in your position are doing. Of course, many small business owners don’t have a salary at all, but that doesn’t mean you have to give up your entrepreneur’s salary yourself. Anyone who is an entrepreneur knows that it’s a tough job, often extending into the middle of the night and weekends. But, the good news is that as you grow up, you can expect your entrepreneur’s salary to go up.
WHY DO ENTREPRENEURS HAVE TO GET PAID? You probably worked harder to start your business than ever before in other jobs in your life. It’s a commitment that never ends. It may not be perfect yet, and you may not have it all, but you need to budget at least to compensate for it. It’s important to know that entrepreneurs have more than one type of salary. Also, no exact equation determines how entrepreneurs pay for themselves. The right choice depends on your industry, age, financial position, and so on. However, this all means that different approaches depend on the nature of the business. There are pros and cons as to when and how salaries are accepted with diverse employer salary options. All of them can help you figure out the exact amount you should pay for yourself.
STEP 1: SEPARATE YOUR BUSINESS AND PERSONAL FINANCES ASAP Start with a separate commercial bank account. If you are still using the same checking account to manage your business and personal finances, fix it now. You should also consider applying for a business credit card with regular payments from a commercial bank account.
STEP 2: PICK THE RIGHT KIND OF ENTREPRENEUR SALARY The IRS’s requirements for owner compensation are different for corporations, sole proprietorships, partnerships, and LLCs, so you’ll need to first determine what your legal rights and obligations are. The salary method is essentially just like getting paid in the workforce. In fact, if you’re an officer of a C-corporation or the owner of an S-Corporation, you’re legally required to receive a regular salary with withholdings for Social Security, Medicare, and federal and state income taxes. Draws are not subject to withholding for Medicare, Social Security, or income tax when they’re paid out. Remember that you’ll still have to report that income and pay equivalent taxes on it at the end of the year. After deducting expenses on Form 1040 Schedule C (sole proprietorships) or Form 1065 (partnerships), what’s left over is profit and viewed by the IRS as the owner’s personal income.
STEP 3: UNDERSTAND THE BENEFITS OF PAYING YOURSELF AN ENTREPRENEUR SALARY Although sole proprietors or partners aren’t required to receive an entrepreneur salary (with the associated withholdings), it’s a good idea to do so anyway. Building in an entrepreneur salary for yourself (even just a small one) from the very beginning will not only make your personal finances more manageable, but it will also help you to keep accurate financial records. In addition, by mapping out your pay, you’ll see the big picture of your company’s wellbeing by establishing a clearer picture of what the company costs to run from the very beginning. When receiving a salary, all employers must receive “reasonable compensation” according to the IRS—which is essentially a figure comparable to an employee’s salary in your role at another business. But what does “reasonable compensation” for your work as a business owner look like? You can also do some homework and utilize websites like Glassdoor, which gives a market estimate for certain positions. Or be resourceful and ask other owners within your industry. This is best for businesses running for a few years and are currently turning a fairly steady profit. Just as with your salary amount, scheduling paychecks as an owner should be comparable to an employee in a similar role at a similar business. These schedules provide good frameworks for your own salary, as well. If you’re paying yourself through the draw system, keep to a consistent schedule as much as possible.
STEP 4: CALCULATING YOUR COMPENSATION
COMPARABLE SALARY
While there is no magic formula or small business owner salary calculator to figure out exactly how much to pay yourself, there are a few useful techniques you can utilize.
If you were hired by someone else to do the job you’re doing now, what would your salary be? Research 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, or Payscale.
GROWTH RATE If your company is growing quickly, you might need all the working capital you can get in order to afford new costs. If you’re taking out more salary than you need, you may force yourself to take on added loans to afford that growth trajectory. That said, keep in mind planning for growth to avoid debts that may cost you more in the long run. WHAT YOU CAN AFFORD The most important consideration when deciding how and when to pay yourself is the amount or amount that you or your family can reasonably live on. Some entrepreneurs are in a position of good fortune, where even a brief absence or a small salary is not difficult. On the other hand, if you need to depend on business income it’s important to plan to do so immediately, at least to some extent.
THE TAX FACTOR Depending on your business’s entity type and whether you’re taking a salary or draws, there are tax pros and cons to taking a pay-out versus reinvesting in your company. An accountant can also help you find ways to make the most of deductions, shareholder distributions, and other tax breaks that will help you find the cash to pay yourself an entrepreneur salary. CASH FLOW Issues with cash flow are the first and most immediate factor that can kill the success of an otherwise thriving business—so this factor will have a significant impact on the small business owner salary you take. If your company isn’t yet turning enough of a profit to pay you, it might be time to consider raising prices to make that happen.
STEP 5: PAY YOURSELF! Deciding how much you will pay yourself when starting a business is an emotional and pragmatic decision. There is no exact entrepreneurial wage equation that can help you decide when and how much, but the best way to avoid emotional regret and gossip is to think strictly in terms of the business side of your rewards. With this in mind, you get what works for your business and yourself.