Before starting a business, there’s one common question everyone asks themselves: how much does a small business owner make?
As an aspiring entrepreneur, it is far too easy to imagine life as a small business owner through rose-tinted glasses. After all, everyone wants to be next Elon Musk or Mark Zuckerberg, but few truly understand the realities of life surviving on entrepreneur salaries.
Unfortunately, the lifestyle afforded by the average small business owner salary is often far from glamorous and luxurious. However, it is possible to create a vibrant, successful business that can not only sustain a family but also generate real wealth.
What the Average Small Business Owner Makes
Although it would certainly be easier for business owners to prepare for a narrow and consistent salary range, this is simply not possible in the life of an entrepreneur. Even looking specifically at averages, there is a wide variance in entrepreneur salaries.
PayScale, a compensation research company, researches average salaries and wages across multiple industries and countries. According to their 2017 data, America’s average small business owner income for the year was $73,000. Although this is a healthy salary, this doesn’t mean that most small business owners can expect to earn this. Instead, it means that about half of all business owners in America will make less than this amount.
The pay scale that small business owners can expect to encounter is much wider than in many fields—it starts at around $30,000 and maxes out at around $182,000 per year. These statistics reflect salaries as well as bonuses, profit sharing, tips, and commissions.
Salary vs. Income
It is also important to note that the average business owner salary is not the same as the average small business owner income. One refers to the actual amount that a business produces, while the other refers to the amount that business owners can take home for themselves.
This distinction is important to make because most business owners will not be able or willing to take home the revenue their business generates. Instead, most revenue will go back into the business to fund equipment, renovations, opening additional locations, offering new products and services, and employee salaries.
Business owners will not benefit from receiving steady and consistent salaries in the same way that their hired employees might. Instead, they can choose how much of their revenue will be dedicated to salaries.
As a result, average salaries are determined in part by personal choices. Some business owners that generate lots of revenue will pay themselves relatively low salaries, while other business owners will prioritize making a healthy salary at the expense of their profits.
What Factors Play Into Entrepreneur Salary
The salary of a business owner is varied and is influenced by a diverse range of factors. Here are just a few factors that can greatly influence your income as an entrepreneur:
- Experience and credibility within your industry
- The field and industry in which you are part of
- Your overhead costs
- The number of employees and partners that need to be paid
Experience can be one of the most major factors in both the success of your business and your annual salary. Although $70,000 is the average overall salary for small business owners, late-career business owners often enjoy higher salaries. The average salary for late-career business owners sits at a comfortable $91,000 according to PayScale’s data.
Location is also a key factor that determines salary. Location can determine everything from the daily foot traffic you receive to specific demographics you should be targeting. Certain areas might also be prime territory for seasonal markets, such as tourism that is specific to a certain landscape and climate.
Unfortunately, it will not always be possible to change some of the factors that will impact your salary. Your experience level will only change with passing time, and changes in the landscape of your industry may be out of your control. Other factors—like your location and your overhead costs—could be improved with wise business decisions.
Entrepreneur Salary Calculator
Ultimately, there is no single tool that can determine your salary. As a business owner, you need to make several hard decisions, including your compensation. That said, there are steps you can take to help you calculate a salary that is accurate, fair and right for your business.
Calculate Monthly Net Income
Before deciding what your salary should be, you should first consider your business’s profit margin. To start this process, you must first figure out your monthly net income.
This relatively straightforward formula can help you determine how much your business can afford to pay. The unfortunate truth is that, in their earliest days, many businesses do not generate enough income to pay owners a handsome salary.
Even without a strong background in accounting or mathematics, any business with proper bookkeeping records can easily calculate net income. The formula for finding net income is simple:
Especially in a business’s early days, it is critical to revisit your salary often and make changes as needed throughout the year.
Calculate Your Tax Savings and Company Debt
No one likes tax season, and unfortunately, as a small business owner, taxes will be a primary focus year-round. A safe place to start is to dedicate 30% of your income to taxes. That being said, the actual amount you will pay in taxes will vary based on a number of factors from your expense deductions to your savviness when it comes to finding applicable tax breaks.
This is certainly an area in which you might benefit from professional services, but if an accountant is not in your budget, then utilizing high-quality tax software is a must to help you get the most accurate calculation for your tax savings.
Once you have calculated your tax needs, it is time to address your company debt. Although it may be tempting to prioritize your salary, it will benefit you, in the long run, to tackle your debt first and foremost. Although nothing can make your debt payments pleasant, it is useful to note that chances are your loan payments will be tax deductible.
Do Your Research
Even once you have a solid grasp on what your business can afford to pay, it can still be complicated to calculate what you should be paid. One strategy that can offer helpful insights is researching your industry.
If you own a hair salon, consider the average salaries of a hairdresser. Apply the same strategy to any field by considering what your title would be if you were a hired employee rather than a business owner. Also look into how salaries vary based on experience and education– if you are a fledgling entrepreneur, it may not seem appropriate to pay yourself the average for a late-career professional in your field.
Use A Digital Calculator
Doing it all on your own can be overwhelming. Luckily, there are resources available that can help—and many of them that are available for free. PayScale offers its own comprehensive salary survey. This handy tool can be used as a small business owner salary calculator by generating a report comparing your education, experience, location and title to national averages.
This tool can determine an appropriate business owner salary, but PayScale also offers several other valuable tools, including cost of living calculators, career goal trackers, and guides on salary negotiation and other relevant issues.
Entrepreneur Salaries: Making the Most of It
Entrepreneur salaries may not necessarily lead to the luxurious millionaire lifestyle that a few outlier entrepreneurs have glamourized, but the average business owner salary can certainly lead to a fulfilling life of success and financial stability.
Regardless of your field and experience level, creating your own small business is an enticing idea. Although it will take hard work, good ideas and a certain degree of fiscal savviness, the result of your entrepreneurship could be a small business owner salary that allows you to pursue your goals and support your family.
Ultimately, however, the benefits of entrepreneurship go beyond making a salary alone. From increased independence to the ability to spend every workday doing something you’re passionate about, there are endless perks to starting your own business.
Of course, building wealth is possible for any savvy small business owner, but it should be far from the only incentive to follow your dreams and become your boss.