Many new entrepreneurs might not know that small business owners don't get to just take money out of their business at will. Instead, they draw a salary. In addition, most of a start-up's income goes to pay operating costs or is reinvested into the business, so funds for a salary may be extremely limited. Business owners will need to consider a variety of factors when determining what salary they should draw.
- The salary you get as a small business owner is directly affected by how much your business makes
- Gender and experience will likely affect your salary and profits
- You can take a salary, a salary with bonuses, or get paid in stock options
Factors That Affect Small Business Owner Salary
Many Americans dream of owning their very own small business. They might be drawn to the promise of independence, autonomy, and working hard on something that belongs completely to them. There's also the possibility that your business could be a huge success.
In August 2022, the salary of a small business owner in the United States ranged from about $30,000 to about $146,000 per year, according to PayScale, a compensation research company. The average business owner's salary was $63,560 per year.
There are a number of factors that affect where you might fall on the average small business owner salary scale. Experience is one of the biggest ones. Business owners with less than 20 years of experience tend to make between $52,000 and $62,000, according to Payscale. However, after 20 years of experience, small business owners tend to make about $75,000 per year.
The wage gap that affects most industries also affects small business owners. Research from FreshBooks showed that self-employed women make 28% less than self-employed men. In addition, 20% of self-employed women say they think they need to charge less than men do to get and keep clients.
How to Determine Small Business Owner Salary
If you’re looking for a magic formula for how much salary to take as a business owner, you’re out of luck. There’s no one way to make that decision. However, it’s helpful to know some basic numbers to help you along the way.
Think about the compensation options available. A straight salary option is the easiest in terms of accounting because the payments are very clear in the books. You can also consider a salary plus bonus or commission structure. This allows you to have regular payments, but also extra payment if business is good. Some owners also prefer compensation in the form of stock options, which may be less complicated at tax time.
The first thing you'll need to know is what your business can afford to pay you. If your business is a startup that hasn’t been turning a profit, you might find need to dip into your savings. Some business owners don’t take a salary at all in the early days of their business.
You may want to try to pay yourself based on your living expenses. You can calculate the least amount of money you can take. You can do this by calculating your monthly living expenses and then multiplying by 12. So, if you typically live on $3,000 a month, you'll probably want a salary of at least $36,000 per year.
Finally, consider what a similar job might pay you for similar work. Considering your experience and skills, how much could you make on the open market? Check out the Bureau of Labor Statistics, look at trade magazines or trade organizations, and talk to other small business owners to see what salary might make sense for your industry.
Reassessing Your Salary
Once you’ve determined your salary, make sure you reassess it regularly. If your business is still in its early days, you might want to recalibrate your salary every six months or so.
After your business is more established, you might want to switch to reviewing your salary on an annual basis. As the owner, your salary will obviously depend on how well your business is doing. If your business is doing well, your salary will go up. If your business is less successful, you will most likely need to lower your salary.
Frequently Asked Questions
How much do small business owners make in the USA?
The average small business owner's salary was $63,560 per year in August 2022, and the salary ranged from about $30,000 to about $146,000 per year, according to PayScale.
How should I pay myself as a business owner?
You can draw a salary as a business owner. You can also draw a salary with the option of an annual bonus, which gives you more flexibility. You could also pay yourself with stock options. However, drawing a standardized annual salary is the easiest way to pay yourself from an accounting perspective.