What is the average small business salary? This article explains the factors that determine what a typical business owner makes.
For the most part, small business owners do what they do because they love it. They’re passionate about their service or product, and they want to provide the best experience possible to their customers.
Plus, there are plenty of perks to owning a company. After all, you’re the boss, you control your schedule, and you ultimately determine the direction of your business.
But business ownership is challenging, and it often involves long hours. The common assumption is that people who run companies are generally well-off. In reality, however, it can take years to make your desired salary as a business owner, and you must work hard to get there.
That’s not to say it isn’t worth it. If you have an entrepreneurial spirit, owning a well-established company is among the most fulfilling careers you could ask for. It’s just important to know what the process looks like so you can prepare.
Below, Hoist discusses the average business owner's salary and much more!
It’s difficult to give a specific number for what the average small business owner makes because it depends on what organization is doing the research. Many factors determine a healthy salary.
For example, ZipRecruiter used data from ADP in December 2021, which showed that a typical small business owner’s salary in the U.S. is about $62,000 a year.
That comes to around $30/hr. Other surveys and studies have found the average salary to be $70,000 or more, while others have found it below $60,000.
The average small business owner’s salary also depends on the entrepreneur, the industry, and several other factors.
For instance, the average business owner in North Carolina makes $45,748, while the typical entrepreneur makes $69,980 in New York.
We’ve mentioned how industry and the state of operation can impact a business owner’s salary, and here are a few other factors that can influence your salary:
Your experience and credibility in the industry can also impact your salary and overall success. The specific location of your company headquarters plays a critical role because it determines the daily foot traffic you receive from your local audience and how far you travel to provide your services. If you offer a home service, the climate will play a part in your success.
Because there is no fixed answer for your salary as a business owner, you ultimately will need to determine your compensation amount. Yes, reinvesting profits in your company is essential for healthy growth, but you must make a living in the process.
Fortunately, with a bit of time and know-how, you can calculate an accurate, fair, and correct salary that allows you to cover your debts and cost of living while moving your business forward.
Start by figuring out your company's profit margin, which requires calculating your monthly net income. You’ll subtract your total expenses from your gross revenue to figure out your net income.
Essentially, this formula tells you how much your company can afford to pay you. But don't get too comfortable with your compensation yet. You will need to revisit your salary regularly and make any necessary modifications to ensure your business remains on a firm footing. These periodic assessments are especially important in the early days of your startup.
Other factors to consider include tax savings and company debt. What you will owe in taxes depends on various factors, such as the type of business you run, your expense deductions, and the tax breaks you qualify for. That said, it is best practice to allocate 30% of your income for small business taxes.
After estimating what you should set aside for taxes, you will need to address business debt. Fight the temptation to focus on your salary because you and your company will benefit in the long term if you prioritize eliminating company debt. Your loan payments may be tax-deductible, which could play in your favor, but having no debt is better.
Some organizational structures enforce legal mandates for business owners to pay themselves a salary that falls within industry standards. But for the most part, your business owner's salary is what you make it.
Some entrepreneurs generating a lot of revenue through their businesses take generous salaries to live comfortably. But many other business owners are either unable or unwilling to bring home the profit their company generates.
In this case, most of the profits are reinvested in the business to pay for new products or services, employee salaries, equipment, renovations, and so forth.
Deciding what to pay yourself is one thing; figuring out when to pay yourself is another. Generally speaking, you should begin taking a salary once you handle your company's cash flow and the business is bringing in a profit. Just don't forget that you will need to consider your salary when planning for the company's operating expenses.
Your legal entity can also play a role. For example, if you are running a corporation, you might wait to pay yourself until you've gone through all the available reimbursements. Perhaps the best way to choose when to start taking a salary is to hire an experienced accountant to go through the numbers and develop a plan.
When determining your business owner's salary, consider the benefits available to you. As a self-employed entrepreneur, you may qualify for affordable health insurance through HealthCare.gov, as well as deduct your premiums on your taxes. You will also want to research group benefits from your insurance provider for your employees.
Along with health insurance, think about applying for a Roth IRA, SEP IRA, or other retirement benefits. Offering a 401(k) can help you retain and attract talent for your employees.
Even if you have figured out how much your company can afford to pay you, take time to research your industry. This research provides insight to help you develop a more specific number that meets your and your business's needs.
For example, look to sites like ZipRecruiter, CareerExplorer, and Salary.com to find the average salaries of employees. Think about what your title would be if you were a hired employee, and you will get an idea of what you should make in the early days of your company. The U.S. Bureau of Labor Statistics (BLS) is another excellent source for researching occupational wages.
Not only do you need to make a living, but you will want to take a reasonable salary, primarily if you are operating as an LLC to S-Corporation. If you neglect to pay yourself a decent wage and opt for taking an owner's draw or large bonus, it could attract the IRS' attention and potentially result in an audit.
Finally, take advantage of online calculators for figuring out what your final business owner's salary should be. Many calculators offer comprehensive salary surveys and generate reports on location, title, experience, and education.
There are many benefits to owning a business, but it’s not easy. Whether you offer a home service, sell products through an online store, or run any other type of company, you can expect to work harder than the average employee. And that includes long hours.
A survey from New York Enterprise Report showed that, as a whole, small business owners work twice the hours of regular employees. The same poll found that 33% of SMBs put in more than 50 hours a week while 25% worked more than 60.
Many other studies demonstrate the long hours often required to run a business. For example, 39% of the SBOs survey by Gallup reported regularly working more than 60 hours per week.
But the hours worked are only part of the equation. Owning a business comes with more pressure—whether or not you have employees. You have fewer resources to rely on if you don’t have employees. But if you have employees, you must deal with the pressure of knowing their livelihoods are dependent on your success.
Then you have challenges like always living with uncertainty (of your company’s success and job security), constantly being on the job, and fighting burnout. Other stresses of business ownership include:
Don’t let these pressures scare you away from getting your dream business off the ground. While owning a business is challenging, most business owners would not want to be doing anything else with their lives.
Few other career paths can give you the freedom and control over your destiny that owning a company can, and it can be more rewarding than you can ever imagine.
You have likely heard countless stories of entrepreneurs who dropped out of college (or even high school) and became successful entrepreneurs.
It’s been proven time and again that you do not need a college degree to succeed as a business owner. But that doesn't mean that getting an education is useless.
It depends on what type of business owner you want to be. For example, you are legally obligated to obtain a degree before starting a legal service, pharmacy, or medical clinic. Even if you are not bound, the process of earning a degree can teach you valuable knowledge, skills, and disciplines that will benefit you in your line of work.
Generally speaking, studying business, finance, marketing, communications, or IT can help you in almost any industry. By far, however, a business degree is the most well-rounded because it provides in-depth knowledge and practice for a wide range of business areas.
Plus, having a degree to fall back on if your startup fails can provide you with confidence and a sense of security. You just need to make sure that you have the time and money to pursue higher education.
Whether you're running a business or thinking about launching a startup, now is an excellent time to consider your business owner's salary. Consider the information and advice above to determine how much you should pay yourself.
Keep in mind that the goal is to take a salary that allows you to cover your debts and living costs without compromising your company's ability to flourish.
If you are overwhelmed with the demands of launching your startup, remember to connect with Hoist. We will give you everything necessary to start and manage a home service business in 30 days.
Sources:
What Is the Average Small Business Owner Salary by State in 2022? | ZipRecruiter
How Hard Small Business Owners Work | SCORE
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