How Much to Pay Yourself as a Small-Business Owner

ByNikolina Cveticanin
September 14,2022

As a business owner, you are likely responsible for overseeing all aspects of your company’s operations. This includes setting your own salary. This decision can be difficult to make, especially if you’re not sure what’s standard or how to determine what’s appropriate for your situation.

In this article, we’ll discuss some factors you should consider when deciding how much to pay yourself as a small business owner.

What To Consider When Setting Your Salary

Setting your own salary can be daunting, especially if you’re a freelancer or small-business owner. After all, you need to make enough money to cover your expenses and earn a profit, but you don’t want to price yourself out of the market. So, what factors should you consider when paying yourself from your business?

Business Structure

One of the first things you should consider is your company’s business structure. Are you a sole proprietor? Do you have a business partner? Are you an S corp? Your company’s business structure will affect how much money you take home and how much in taxes you need to pay.

For example, if you’re a sole proprietor, you’ll likely take home less money than if you’re running a corporation because you’ll be paying taxes on both your business income and personal income.

On the other hand, if you’re running a corporation, you’ll only be taxed for your corporate income. This means that more of your business profits will stay within the company, which can be reinvested or distributed to shareholders.

Business Expenses

Another factor to consider when paying yourself as a small business owner is your business expenses. How much does it cost to run your small business? You should consider expenses like rent, utilities, payroll, and marketing. You’ll need to make enough money to cover these costs, plus your personal living expenses.

One common mistake small business owners make is not accounting for all of their business-related expenses. Make sure you have a clear understanding of all the costs associated with running your business before you start setting your salary.

Personal Living Expenses

In addition to business-related expenses, you also need to account for your personal expenses, such as housing, food, transportation, and health care. Again, one common mistake people make is not accounting for all their personal expenses when calculating the business owner’s salary.

Industry Standards

Another factor to consider is industry standards. What do other businesses in your industry pay their employees? This will help you determine a reasonable salary for yourself as the business owner. Of course, you don’t want to undervalue your services. 

Ultimately, setting your salary comes down to determining what you need to earn to cover your costs and make a profit and then finding the right balance between pricing yourself too high and too low. By taking the time to consider all the relevant factors, you can ensure that you set a fair and competitive price for your services.

How to Calculate Your Owner’s Pay

You should consider a few balance sheet items when calculating your salary as a small-business owner. These include your monthly net income, all business-related taxes and fees, and business expenses. 

According to some small business revenue statistics, 86.3% of small business owners earn less than $100,000 a year. However, this does not mean you must stay within this bracket. Below are some steps you can take to get a clear picture of a small business owner’s salary and how to calculate it yourself.

Calculate Your Monthly Net Income

Your monthly net income is the total revenue your business brings in minus any taxes or fees. This number can fluctuate from month to month, so it’s important to take an average over a period of time to get an accurate number. 

Next, you’ll need to subtract all business-related taxes and fees. This includes income taxes, self-employment tax, and any other business-related expenses. Once you have your monthly net income minus taxes and fees, you’ll be left with your profit. 

Calculate Your Tax Savings

The next step in calculating owner pay is determining your tax savings. This includes any deductions you can take for business expenses, home office expenses, and health insurance premiums.

You can consult with a tax professional or use a tax calculator to get an accurate number. Once you have your tax savings figured out, you can add this amount to your monthly net income to get your total monthly compensation.

Calculate Your Business Expenses

The final thing you’ll need to consider when setting your salary is your business expenses, including office rent, utilities, supplies, and employee salaries. Once you know how much it costs to run your business each month, it will be easier to calculate how much to pay yourself as a small business owner.

One mistake many small business owners make is not accounting for their salary when calculating their business expenses. This can lead to severe financial problems down the road, so be sure to include yourself in the equation.

By following these steps, you should be able to come up with fair and reasonable compensation for yourself as a small business owner. Remember to avoid common mistakes, and you’ll be on your way to success. 

Ways To Pay Yourself

As a business owner, you have two options: Either pay yourself a salary or take distributions from your small business. Here are the pros and cons of an owner’s draw vs. a salary. 

Paying Yourself a Regular Salary

To pay yourself a regular wage, just like you would an employee, you’ll need to set up payroll for your business and withhold taxes from your paycheck. One advantage of this method is that it can help you separate your personal and business expenses and make it easier to track your business expenses come tax time.

The downside of drawing a salary is that it’s subject to payroll taxes, which can eat into your earnings. Additionally, if you have a slow month or two, you may find yourself struggling to cover your personal expenses if you’re relying solely on your business income.

An Owner’s Draw

If you are self-employed and paying yourself a salary, an owner’s draw is another method you can use. This method is often used by small business owners with irregular or variable income. With an owner’s draw, you simply draw money out of your business bank account as needed to cover your personal expenses.

One advantage of this method is that you don’t have to worry about payroll taxes. Additionally, it can give you more flexibility regarding how much money you take out of your business each month. However, one downside is that it can be challenging to track your small business expenses come tax time.

So, which method is right for you? How to pay yourself as a sole proprietor? Ultimately, it depends on your circumstances and the needs of your business. If you have a stable and predictable income, having a regular salary may be the best option. However, if your income is variable or unpredictable, an owner’s draw may be a better option.

Final Thoughts

Paying yourself as a business owner can be a tricky task. And there’s no universal rule on how much business owners should pay themselves. However, by following some simple guidelines, you can ensure that you are fairly compensated for your work without putting your business finances at risk. 

What’s most important is to find a method that works for you and your business. And, of course, to avoid any common pitfalls.

FAQ
What expenses can you write off as a sole proprietor?

Sole proprietorship has many advantages, including the possibility of writing off some expenses you would otherwise have to pay for. These include business-related travel expenses, office supplies, and banking and insurance fees.

As a sole proprietor, you can deduct your health insurance premiums and a portion of your self-employment taxes.

What percentage should you pay yourself from your business?

There’s no magic number when it comes to how much you should pay yourself from your business. However, you’ll want to make sure that you are fairly compensated for your work, but at the same time, you don’t want to overpay yourself and put your business at risk.

How do entrepreneurs pay themselves?

Most small business owners pay themselves a salary or wage just like any other employee. However, because they are business owners, they may also take money out of their business through dividends or distributions. This is known as an owner’s draw. 

And if you’re unsure which of these two methods is better or how much to pay yourself as a small business owner, you can always consult a tax professional or financial advisor.

Can I transfer money from my business account to my personal account?

You can transfer money from your business to your personal account. All you have to do is ensure that the amount you transfer is documented as a business expense. This can include salary, dividends, or distributions. Just keep good records of all transfers and all wages paid to avoid any mix-ups come tax time.

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The approach you should take depends on who your customers will be. For instance, if you're targeting young people, social media platforms like Twitter and Instagram can be helpful.  If you're unsure how to proceed with this, you might want to consult a marketing expert, although that could be expensive. Power Structure You only need to create a power structure to define the business’s hierarchy if you have employees working in your laundromat. Include job descriptions and specific tasks for every employee to avoid miscommunication and boost efficiency in the workplace.  If you work independently, skip this part of the business plan. Business Objective Before starting or buying a laundromat, you need to have a vision of where you want to take it. Do you want to build a laundromat empire, or are you happy with one location, at least at first? What services would you like to offer?  Once you answer these and other questions, explaining your business objectives over several paragraphs will be easier. Target Market Identification You can’t truly begin to prepare your business until you know who your market is. Owners need to analyze their services and predict how the market will respond once they open laundromats. You'll also need to set prices for your services once you’ve researched the market to avoid charging too much or too little. With this in mind, you can identify your target market demographic, including age, gender, career type, and location.  Competitor Analysis Analyzing your competition will help you differentiate your laundry business from others that are out there. You can proceed to this step once you’ve defined your target market. Financial Goals and Objectives Next, you need to decide on your short- and long-term plans. This will include any expansions you might want to make to the business.  To do this, you'll need to research the untapped population in your target market and decide what percentage of that you think you can reach. Note that you'll need some statistical knowledge or help from an expert to complete this.  Types of Services To estimate laundromat startup costs, you need to decide what services you'll offer. In this section, you should outline whether or not you’ll provide folding, delivery, entertainment, and other relevant services. Marketing Analysis Consider factors like market segments, target households, inbound visitors, and product pricing to develop a clear marketing strategy for customer satisfaction and increase your chances of success. Strategy You have to specify how you plan your business to succeed, especially if the competition is fierce. Outlining your strategies for breaking into the market, building your reputation, and maintaining a stable business for years to come is crucial. Financial Plan You should use this section to project your business’s gains and losses, monthly and annual earnings, and break-even margins. As you can imagine, crunching the numbers is one of the most important   Common Ways To Raise Funds for a Laundromat Business You came to this page wondering: "how much does it cost to buy a laundromat?" We hope that by this stage, we’ve given you a fairly comprehensive answer to that question. But knowing how much you need and actually getting that money are two very different propositions. In this section, we’ll give you some ideas for raising the funds you need. Attract Investors Reaching out to investors is one of the best ways to secure funds for your new laundromat business. But it’s not just about money; experienced investors can give you advice that could be critical to growing and maintaining a successful business. That's why you should do your homework and present a detailed business plan to convince the right people to invest in your startup. Of course, nothing in life comes for free; you’ll have to give up some percentage of your profits and/or control of your business to get investors on board. But if it helps you get started and avoids the risk that comes with taking out a business loan, then it might be worth it. Take Out a Loan If you prefer to start independently, there are several types of loans to open a laundromat. These include: Term loans, which come with fixed monthly payments and pre-defined terms.  Equipment loans, which are suitable for financing substantial equipment purchases, with the equipment you buy serving as collateral. SBA (Small Business Administration) loans; government-backed loans with low-interest rates and long terms. The downside is that approval for these loans usually takes months.  There’s always an element of risk to taking out a loan. Make sure you crunch the numbers beforehand, otherwise you might end up biting off more than you can chew.  Open a Franchise Laundromat Opening a franchise may be the best solution if you don’t know how to start a laundromat business with no money. That way, you get help, resources, equipment, and training. Moreover, the franchisor will provide you with a proven business model and help you open quickly. Before you join, however, you should reach out to several franchisors and compare their offers to ensure you're making the best choice. It’s also worth speaking to other franchisees to see if they’re happy with how the business is run. The main advantage of this option is that you'll get brand recognition and support from the franchisor. Also, many customers trust franchises more than independent businesses. The biggest downsides are that you’ll have to pay upfront royalties and fees, you’ll have to give a percentage of your revenue to the franchisor, and you’ll never have full control over the business. Final Tips To Open a Laundromat Once you get your laundry business going, you might do better overall and increase your revenue if you take the following steps: Start a loyalty program to retain customers. Offer free products, like detergents, with every wash. Sell detergents, fabric softeners, or other related products. Open a small cafe so customers can enjoy a coffee while they wait. Install TV screens and gaming consoles to make the wait more pleasant for customers. Offer extra services, such as laundry pick-up, delivery, dry cleaning, ironing, stain removal, and folding. Conclusion You have plenty of laundromat business ideas and you now know your options, so there’s never been a better time to start planning your business. Remember that a laundromat is a significant investment, so do your homework and develop a detailed business plan before taking the plunge. 
By Nikolina Cveticanin · August 24,2022

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