The average entrepreneur salary in the USA is somewhere between $68,000 and $72,000. It’s far higher than the average incomes in many industries but there are also many entrepreneurs who don’t pay themselves at all. So, if you’ve started your own business but are sitting on the fence about your salary, then this article is for you. It’ll walk you through how to calculate a fair wage and the key aspects to consider along the way.
Should You Take a Salary as An Entrepreneur?
Although some people begin working life as entrepreneurs, many start their business on the side. They manage their start-up around a fulltime job, often working on it in the evenings and at weekends. Since their main job pays the bills they might not think about taking a salary from their venture in the beginning. But is this the right approach?
There’s no question that if your business is your main source of income then you need to pay yourself a salary. After all, there are bills to pay and mortgages to keep up with so you need to keep those in check. Even if you’re worried about taking money out of the business, it’s crucial that you put some serious thought into paying yourself an appropriate entrepreneur salary.
Calculating Your Entrepreneur Salary
If you do decide to pay yourself, then how much should it be? As much as the business can afford or just enough for you to live on? Unfortunately, there isn’t a hard and fast rule for calculating an appropriate entrepreneur salary. However, there are some factors that you can weight up that’ll help you land on a reasonable figure.
What is Reasonable Compensation?
The IRS state that all employees should receive ‘reasonable compensation’. This means that your entrepreneur salary should be in line with comparable roles at similar companies. Recruitment websites like Glassdoor can give you an idea of the type of salary paid by other organizations.
There are also tax implications of withdrawing an entrepreneur salary compared with reinvesting the money into your business. Since these are complex and differ by business structure, it’s best to get the advice of a qualified finance professional. You may find that the tax considerations decide your salary for you since the rates go up at specific cut-off points.
Cash flow is the lifeblood of any business so it’s important to consider how drawing a salary will affect it. Are you generating a consistent income that allows you to pay yourself a salary? Do your customers pay on time and would you still be able to pay yourself if an invoice became overdue? Do your figures based on the worst case as well as the best case so that you won’t be caught out in a quiet month.
Salary or Owner’s Draw Method?
Once you’ve determined how much your entrepreneur salary should be, it’s time to think about the method you’ll use to pay it. The salary method will be familiar as it’s similar to how you’ll have been paid if you worked for other companies. You’ll receive funds on a pre-determined schedule based on a fixed amount or the number of hours you’ve worked. If your company has either a C or S corporation structure then you may be legally obliged to use the salary method.
The owners draw method is where you take a portion of the profits as salary (not to be confused with a proportion of revenue). You’ll need to account for all of your expenditure first so that you know exactly how much money you’ve made after costs. This option is available to most types of business structure.
Paying your own salary is one of the biggest rewards of starting your own business. Whatever amount you decide upon, be sure you’ve done your homework and can afford to pay it consistently (even if your customers don’t always pay on time).
How We Can Help
Strategic Capital offers business loans, merchant cash advances, and invoice factoring services that support organizations across the USA. We don’t require capital which means that your personal and business assets aren’t part of the equation. If you’re in need of short-term financing, then we can help. Whether it’s to pay for emergency repairs or investing in expansion we offer small business loans without the need for collateral. Best of all, you’ll benefit from competitive repayment terms and low interest rates, so you have more money to reinvest in your business.
Transparency, innovation, and expertise are the driving factors behind everything we do. With a talented team of advisors, a plethora of funding partners, and the best technology available -we go above and beyond to help our clients receive their capital rapidly with the industry’s most competitive repayment options and interest rates. We want to break speed records, not bank accounts.
Upon submitting your application, it’s reviewed by a dedicated Capital Advisor. We generate the best rates and terms at lightning speed through our funding matrix and robust lender network. Yep… it’s that simple. Learn more about our small business loans here.
– Bradley Keys