According to a study done by American Express OPEN, the average business owner’s salary is $68,000. But, does that mean you will make that much as a small business owner? Probably not. While that may seem like a lot of money to some people, the salary average can be shifted by a group of very high or low earners. Either way, there are a lot of implications for taking a salary as a business owner. In reality, a business owner’s salary affects tax reporting, individual income flexibility and of course, the business operations.
Salary Affects Taxes
For business tax purposes, salary reporting can make a big difference in how much taxes you and the business are required to pay. If the business as a sole proprietorship or DBA, it’s much easier for the owner to take out profits of the business as they please because the taxes are all done under the same person.In most cases, the business owner will use his or her Social Security number for personal and business tax reporting.
LLC, S-Corp And C-Corp Options
However, if the business is a Limited liability Company, S Corporation or C Corporation, business owners have multiple options for taking money out of the company. They can pay themselves a salary or through owner’s drawings. Each of these have separate tax implications that are designed to maintain reasonable salary payments to the owner and proper business profits reporting to the IRS. For further details on a small business LLC, you can speak to your financial accountant.
Salary Affects Overhead
Business owner salary affects overhead greatly. If you plan on increasing your salary as soon as you hit the break-even point, then you will once again be in loss. In order to increase the owner’s salary, the business has to be profitable enough to absorb the additional costs.
Owners Are Limited
Logically, the owner of the company is limited to the profits generated by the business. It is not sustainable to take a higher salary than required when the company is not operating a profit. Although this is the case in certain start ups, investors will usually make sure that the founders are not abusing their salary. Once the company begins to grow profitably, the business center can then take a salary for himself or herself, slowly increasing it accordingly and within reason.
After some time of sustained growth, this is when you will have to take profits out of the business through drawings, rather than just salary alone. This is a rather great problem to have and is not included in a business owner’s salary or intangible assets. Instead, it is calculated separately in the business profits.
Another Thing I Wish I Had Known
In addition to having realistic salary expectations, there are many things that tons of small business owners admit they wish that had been aware of before opening their business. The number one complaint of small business owners? “I wish I had known that things never get easy.” Owning and operating a small business requires a LOT of work, and not just in the beginning couple years. Oftentimes, entrepreneurs are misled to believe that business ownership gets easier as time goes on. Unfortunately, that is not the case. Owning a business is a time-consuming commitment to hard work all year round for as long as your doors are open. At times, you may wonder “if an MBA was worth it?” If you are thinking you may open a small business, remember what it a long-term commitment it will be and do not be misled to believe it will be easy. Any small business owner will tell you, it is a lifetime of hard work that is worth it only for a few very passionate entrepreneurs.
How Much To Set Your Salary
In order to set your own business owner salary, you should have profits. Otherwise, you will take a salary at the loss of the business. Many owners who are focused on the profitability of the business will only take a salary when there are profits. If you would like, you can set a percentage of profits as your salary. This would enable you to project your own business owner salary based on previous months, quarters or years. Be careful when setting your salary as business owner because it can impact the cash flow of the business significantly.