When we think about how much entrepreneurs pay themselves, we often think of two extreme ends of the spectrum. We think about the successful startup founders who pay themselves millions of dollars per year. We also think about the entrepreneurs who pay themselves little or nothing in order to keep the business running smoothly.
The truth is that most entrepreneurs fall somewhere in the middle of the spectrum.
You want to pay yourself something for a number of reasons: to show the IRS that you’re a legitimate business and to show commitment to your employees and investors. You also want to pay yourself something in order to prove to yourself that your work is valuable (and has a monetary worth) and to avoid burnout.
However, you can’t pay yourself too much or else you’ll harm your business. So what’s the magic number?
As with most things in entrepreneurship, that’s up to you! There is no one-size-fits-all formula. However, the national average hovers around $70,000 per year. Still, however, there are a number of factors to consider.
Most importantly, and perhaps most obviously, you’ll want to make sure you pay yourself enough to cover basic necessities and emergencies. Beyond that, you should check out competitors’ salaries on the Small Business Administration Income Statistics Page or on Glassdoor.
You’ll also want to gain a firm grasp on the two main ways of paying yourself — owner’s draw vs. salary — and explore the tax implications of each. There are positives and negatives to both. One method lends itself nicely to software that automates the accounting process. The other allows you more freedom.
Check it out!
This week’s contributor, Meredith Wood, is the founding editor of the Fundera Ledger. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, and StartupNation.