The Entrepreneur Salary: 5 Steps to Paying Yourself First

Being your own boss, bringing ideas to life, and hustling to hit goals are just some of the thrills of entrepreneurial pursuit. And while it might be easy to picture yourself having your own business, getting it to prosper takes hard work and time. One way to factor in your success is to establish an entrepreneur salary.

It’s worth mentioning that only 49 percent of entrepreneurs pay themselves a salary, and those who do make an average of $44,000 a year in the United States. If you want to maximize your earnings by paying yourself first, follow this guide to learn how much entrepreneurs make in each city, and what the steps are to building an entrepreneurship salary.

See Average U.S. Salaries

What Is the Salary of an Entrepreneur?

The average entrepreneur salary in the United States is $44,000, though salary can vary between $16,500 to $184,500 and depends on various factors including skills, experience, and location. As you gain more experience, your entrepreneur salary has a chance of increasing as well.

Why Should You Pay Yourself a Salary?

Many entrepreneurs see owning a business as a passion and might forgo paying themselves a salary. However, establishing an entrepreneur salary can be seen as a way to reward your hard work and accomplishments. After all, you put a lot of work into your business, and you deserve to be paid for it.

Still, it’s important to draw a boundary between the business and your personal finances and create a strategy to pay yourself a salary. Not paying yourself can distort your company’s true earnings, since your salary should be a part of the company budget.

5 Steps to Building an Entrepreneur Salary

Rewarding yourself for your hard work does come with some planning. When it comes time to manage your business finances, follow these steps to set your entrepreneurship salary:

Step 1: Separate Your Personal and Business Finances

It can be easy to mix up your personal and business finances if there’s not a defined line between the two. Having a set plan to track your business income and expenses is the first step to building your entrepreneur salary.

Start with opening a business bank account, and move all of your company’s income and expenses to it. You can also apply for a business credit card to help build credit.

Step 2: Find Out How to Pay Yourself First

Paying yourself an entrepreneurship salary can prove that your financial well-being depends on the success of your business, and shows to employees and investors that you are committed to it. In addition to that, it indicates to the IRS that your business is legitimate.

Establishing an entrepreneur salary from the beginning will help you keep accurate financial records and help you paint a better picture of what the company’s costs are and what issues need to be addressed.

Reasonable Compensation

It takes some research to figure out how much you should be paying yourself. According to the IRS, all employers must receive a reasonable compensation, which is essentially something comparable to wages of employees with a role similar to yours.

Start your research by looking at how much similar entrepreneurs are being compensated for in your area. You can also research positions that align with yours in other companies or ask other business owners in your industry.

It can also be beneficial to take a look at your personal finances and figure out what you need to cover basic living expenses. You might also consider setting your entrepreneur salary as a percentage of your business’s profits, in case you’re concerned about covering fluctuating expenses.

 

Taxes

When deciding how much to pay yourself, it’s important to take taxes into account. There are advantages and disadvantages of taking a payout or reinvesting in your company.

Consulting with an accountant can be a good way to figure out which tax regulations affect your type of business entity. They will guide you through how to make the most of your deductions, shareholder distributions, and any other tax breaks.

 

Payday

Now it’s time to plan when you will be getting paid. Scheduling your paychecks will help you manage your business’s expenses better.

Generally, companies will schedule employees’ pay on a weekly or monthly basis. Talking to your accountant can help you decide if it’s better to pay yourself weekly, twice a month, or monthly.

Having a consistent schedule can also help you manage your finances. Additionally, it will assure the IRS that everything is being accounted for since inconsistent withdrawals could potentially trigger a tax audit of your company.

 

Step 3: Pick a Payment Method

You also need to decide how you will pay yourself. It’s worth noting that IRS ownership compensation requirements differ depending on your type of business entity:

• Sole proprietorship: One person or a married couple is the sole business owner.
• General partnership: An entity with two or more business owners. They agree to unlimited liability and all of them assist with day-to-day operations.
• Limited partnership: An entity with two or more business owners, with at least one being a limited partner. They agree to limited liability and the limited partner doesn’t assist with day-to-day operations.
• C corporation: An independent legal entity separate from the business owners.
• S corporation: An independent legal entity separate from the business owners; owners report revenue as personal income.
• Limited liability company (LLC): Combines the simplicity of a partnership with the personal liability protection of a corporation.

Once you’ve identified the type of business you have, you can choose between the two main methods to pay yourself an entrepreneur salary.

The Salary Method

Paying yourself through the salary method is essentially the same as getting paid in the workforce. You’ll be paid on a regular schedule and it will be a fixed amount or based on the hours worked.

Keep in mind that, if your business is registered as a C corporation or an S corporation, you are legally required to receive a regular salary. This means it will include withholdings for Medicare, Social Security, and federal and state income taxes.

Business entities that can use the salary method:

• C corporation
• S corporation
• LLC (if treated as a corporation for tax purposes)

The Draw Method

When using the owner’s draw method, you will withdraw money from your business revenue to pay your entrepreneur salary as you see fit. Instead of a regular fixed income, this allows for greater flexibility and the possibility of adjusting how much money you earn depending on your business performance.

Although you could withdraw as much as you want for your salary, make sure to account for all business expenses before doing so. Keep in mind that taxes aren’t automatically deducted with this method, meaning you will have to self-report the withdrawals and pay taxes on them. This requires more tax planning, which includes quarterly tax estimates and self-employment taxes.

Business entities that can use the draw method:

• Sole proprietorship
• General partnership
• Limited partnership
• LLC

Step 4: Consider Factors That Affect Your Compensation

After researching a reasonable compensation for yourself and considering taxes and your payment schedule, there are a few other factors to consider that may affect your compensation.

Employee Compensation

If you have one or more employees, you’ll want to consider their salary and what was promised to them. Calculate how much you will have to pay your employees, as well as if they were promised equity compensation, such as options, restricted stocks, and performance shares, or any potential bonuses down the line. This will help you have a better understanding of what you’ll be able to budget for your own compensation.

Cash Flow

Successful business owners have a clear understanding of their company’s financial reports. Before you decide your entrepreneur salary, gain more insight into your company’s cash flow, even if that means talking to an accountant.

Although your business will likely not be very profitable in the beginning, making sure your basic expenses are being covered can help you better manage for future growth.

Growth Rate

Planning for growth is important for your business to keep flourishing. With growth comes new costs, so taking a larger than necessary amount for your salary can hinder the business’s potential earnings. It’s important to take your business needs into account before building your salary, and avoid being short on money at the end of the month.

Personal Finance

One last thing to consider when setting your entrepreneurship salary is what you can afford. Taking a look at your personal finances can help you figure out how much money you need to at least cover basic costs.

Some people might not need the extra capital to pay for personal expenses, whether it’s because they have enough savings or their spouse’s salary is sufficient. If that’s the case, you could instead decide to take out the minimum amount and reinvest the rest back into your business.

Others will solely rely on this income to pay for their living expenses, so it’s important to plan ahead so both your personal and business expenses are being taken care of.

Step 5: Calculate Your Entrepreneur Salary

There’s no magic formula to calculate your entrepreneur salary. But with enough research and planning, you can indeed grow your business in tandem with your personal wealth.

Now it’s time to put all these steps into action and figure out the salary you deserve. After all, hard work does pay off.

Average Entrepreneur Salary by City

Your entrepreneur salary will vary depending on where you live due to the cost of living as well as the market’s acceptance of new and small businesses. Here are the average salaries of an entrepreneur in different cities throughout the United States:

How Entrepreneur Salaries Compare to Similar Careers

There’s not a set salary for entrepreneurs since it varies by location and field of work — this is a fine starting point to also determine your entrepreneur salary. Pore over this list of titles across different fields to help inform what your salary should be.

Paying yourself as an entrepreneur can show your investors and employees that you are fully dedicated to the company, plus it’s a great reward for your hard work. Establishing an entrepreneur salary and staying committed to your personal and business finances can help you pursue your dream of owning a business, and also get paid for it.

Sources: Guidant | Business News Daily | Entrepreneurship Monitor