How Much Should a Business Owner Salary Be?

March 14, 2022

What Is the Right Business Owner Salary?

Building your own business can be a tremendously rewarding experience. However, no one ever said you have to work for free. You deserve to be adequately compensated for all of your hard work and financial investment.

And, in some cases, the IRS may have an opinion on the matter, too!

The requirement to take reasonable compensation for business owners may seem odd, but it makes a lot of sense. Most owners want to see their businesses survive, and so it’s fairly common for many of them to minimize (or even avoid) taking any compensation. A recent survey from Square found that as many as 38% of business owners don’t take any salary [1].

As a business owner, you know how difficult it is to find public information on business owner salary. There are so many variables, from the type of business you are running to your geographic location, to the type of business entity you established for your enterprise. In this post, we’ll discuss some of the steps to approach your small business owner salary decision — so that the business can support you back.

How Business Owners Pay Themselves

Most people think about compensation in terms of an employee’s salary, but there are actually two main ways to pay yourself as a business owner [2]:

Salary – A set wage that you pay yourself according to a regular timeline (i.e., every two weeks). Payments are regular and automatically taxed, but they are not flexible.
Owner’s draw – Taking withdrawals from the business profits as needed. These payments are flexible but not automatically taxed.

Depending on your needs and the goals of the business, there may be good reasons to go with either method.

The way the business is set up with the IRS will also make a difference in how the owner is compensated. For instance:

If you have a sole proprietorship, partnership, or an LLC that’s taxed as a partnership or sole proprietorship, then you’d use an owner’s draw.
If you have an S-Corp or C-Corp (or an LLC that’s taxed as an S-Corp), then you’d use a salary.

Please note that S-Corp owners can use both salary and pass-through distribution income to receive their payouts. Salary is subject to income and self-employment taxes. Distribution is not subject to self-employment taxes. If you run a business that is set up as an S-Corp for tax purposes, be sure to consult with a financial planner or tax planner on the best way to structure your compensation.

What Is the Average Business Owner Salary?

The average business owner salary in the U.S. is $83,000. It ranges from $45,000 at the bottom 10^th percentile to $151,000 at the top 90^th percentile [3]. Owners in California earn the most, while those in Mississippi are on the lower end of the range.

By contrast, the average small business owner salary in the U.S. is $56,327. This is also dependent upon where you live. For example, the average small business owner salary in New York is $69,980, while it’s only $45,748 in North Carolina [4].

How to Determine the Right Business Owner Compensation

As the person who’s most vested in the success of your business, there are some important questions to ask yourself before deciding how much salary to take.

What Stage Is the Business In?

If the business is just getting started, then you may wish to keep as much money in it as possible. That strategy can allow you to cover your bills, pay employees, and have an emergency reserve of cash just in case. However, if the business has entered an established phase, then it should be financially stable enough to release some of the funds for you.

What Are My Financial Obligations?

Did you take out a personal loan, charge a credit card for expenses, or even borrow against your home equity to build your business? These are very common ways for owners to get the funding they need quickly. However, these strategies can also put your personal assets (such as your home) at risk. Don’t let your business aspirations sabotage your family finances. Make sure you’re adequately compensated, so that you can pay back your personal financial obligations.

How Diversified Do I Want to Be?

Many owners see investing in their business as their primary goal and the best opportunity for ROI. However, it is important to not dismiss other financial opportunities, such as investing in the stock market, real estate, or contributing to your retirement funds. Owners who limit their investment field to their business miss out on these strategies — and also expose themselves to concentrated risk. Consider diversified investments outside of your business, especially if there is a tax-preferred way to get it done.

What Are the Tax Implications?

Owners who receive a salary pay taxes automatically through their payroll process. However, those who opt for an owner’s draw do not get the benefit of an automated deduction. If you decide to use the owner’s draw, it’s important to plan for how you will pay the related taxes. Keep in mind that the IRS will expect that you make quarterly payments.