When you are deciding whether or not to start a small business, you need to know if it’s going to be worth your time and effort. You need to have at least some idea of how much you’ll be able to make. There’s no such thing as a crystal ball, but there are some general concepts that can help give you a good understanding of what to expect with a small business owner salary.

How much do small business owners make?

On average, a small business owner usually makes around $72,000 per year. Given that there are about 30 million small businesses in the United States, this average reflects a pretty wide range of salaries. Why is this important? Because you have your own set of living expenses and income goals. To help set your own salary, you’ll need to figure out your bottom line, and then what your business would need to make in order for you to meet your specific financial needs.

Another great idea is to look at salaries in your industry. This should give you a rough idea of how much you could make doing the same thing on your own, rather than working for a company. 

Why is it important to set your own salary?

When you are a small business owner, you are your own boss. Therefore, you are in charge of setting your own salary. It’s important to carefully consider a budget that encompasses all of your expenses and expected income before deciding how much to pay yourself.

While the average small business salary is around $72,000 some people are surprised to learn that some business owners pay themselves nothing. This is especially true in the first couple years when businesses are just getting off the ground

Some business owners opt to forgo a salary and instead reinvest everything into the business, it’s best to reconsider this strategy. The time you invest in your business is a precious commodity! You need to be compensated for the time you spend, or you’ll lose your motivation and passion.

On the other hand, some small business owners pay themselves too much. This eats away at money that needs to be used for operating costs like supplies, rent and utilities. You just need to strike a balance between your needs and motivation and the needs of the business.

Part of your budget making process needs to include good tax planning. Businesses that successfully take advantage of tax deductions can really boost their post-tax salary. NorthOne has a great guide to taking advantage of business tax deductions. By strategically choosing what you spend your money on, and when you spend it, you can really save money on taxes.

Whatever you decide to pay yourself, Certainly, the time you are willing to put into your business will affect its success. Working smarter, not just harder is a great goal to work towards so you can achieve a great work-life balance and a successful small business.

What is a step by step process for setting your own salary?

Setting your own salary helps you strike a balance between compensating yourself for the valuable time you’ve invested in your business, and staying within your budget. Periodically you can revisit your salary and decide if it’s too little or too much for your budget and time. 

This step-by-step process will help you set your own salary, while still leaving room for the necessary costs of running your business.

1. Calculate your expected profit. 

This is the amount of money left over after you subtract your expenses from your income. So, take your gross revenue, which is all the money you took in, then subtract your expenses, and this leads to your net income, or profit.

2. Set aside money for taxes

Remember that you’ll need to set aside what you expect to pay in taxes. You certainly don’t want to come up short at tax time. Consult an accountant or tax lawyer for help in determining how your small business income factors into your own personal tax liability.

3. Set aside money for debt repayment

If you took out a loan to start your business or make improvements, you need to factor in money to pay back this loan. Talk to a financial professional about restructuring your loans, or utilizing other financial products that will allow you to lower your monthly payments.

4. Make sure to have savings available.

Having a nice comfortable amount of savings is crucial for keeping your business going in the long term. There’s always going to be unforeseen situations where things come up: repairs, improvement or hiring for instance, so you need to have money saved just in case. This really helps to reduce your stress level, because you’ll know that whatever comes your way, you’ll be prepared.

5. Consider your personal needs and goals.

Finally, evaluate your personal needs.These include things like your own mortgage or rent, car payments, groceries and personal desires like a new car, vacations, etc. If you determine that you won’t have enough left over for all these things, then go back and take another look at your budget. You may need to find ways to lower expenses or charge more for your goods and services.

Your salary: compensation for your hard work.

Carefully go through the steps above to figure out how much money is available to pay yourself a salary. Remember how hard you work! You deserve to be rewarded for the time and effort you put into your business.

Time is just as precious of an investment as money, maybe even more so. That’s why it’s worth the effort to find that perfect balance between being conservative with your business budget and making sure you are paying yourself a healthy salary.

As your business grows and becomes more successful, your salary and compensation should grow along with it. Be proud of what you’ve accomplished!

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