How Much Should an Entrepreneur Pay Themselves?

by Carrie Smith 5 Minutes

business salaryWhether you run a small agency or are a business of one, it can be difficult to know how much to pay yourself. You don’t want to be paid too much and cause your cash flow to suffer, but you also don’t want to pay yourself too little and not be able to pay the bills. 

The reason you became your own boss is likely because you wanted enough income to stop worrying about money so you could focus more on creating and doing what you love.

But the economic system is set up on trading money for goods and services. 

So how big of a salary is too much, and what amount is too little? Is it possible to find a balance with getting paid what you’re worth while still turning a profit? 

Figuring Out Your Starting Salary

There are multiple schools of thought on this subject, but ultimately it comes down to the type of business you have, and your perspective as an entrepreneur. 

Consider these factors before deciding on salary amount: 

  • Level of experience. Are you a well-seasoned business owner, or are you new to the game? How much experience you have, what your credentials are, and how much time you’ve invested in this career will factor into your starting salary amount.
  • Type of industry. What kind of business do you run and how does it compare to the rest of your industry? Tech-based businesses can afford to keep their overhead low, leaving more room for a larger owner’s salary. Service-based business can also afford to pay a higher amount, if they continue keeping the bootstrapping method in mind.
  • Your personal beliefs. Some business owners (like myself) prefer to run a business without using debt products, while others may be open to business loans or taking on investors. Make a salary decision based on your personal beliefs and what you’re most comfortable with.
  • Stage of your business. How long has your business been in operation? If it’s fairly new, you may not be able to pay yourself a salary at all. But if your biz is several years old, it may be able to stand up to a larger owner’s salary figure, and perhaps even need that keep growing. 

6 Types of Salaries for Entrepreneurs

Now that you know what factors to use when choosing the best salary method, here are six different ideas for determining how much you should get paid. 

1. No Salary 

Budding entrepreneurs sometimes never get paid, at least for the first few months. The reason they choose to do this, is to give their businesses a fighting chance, by investing all the profits right back into it. 

It can be difficult to choose this method, but if you’re able to find an employer, backer, or investor to pay the bills while you build an empire, this could a smart choice. You can focus 100% of your ideas and creativity into this project, and watch it pay you back over time. 

2. Bare Minimum 

This method is based on your personal or business expenses and what your bare minimum figure is for paying all the bills. Be sure not to include any unnecessary extras, and simply focus on what you need to get paid in order to survive. 

If you want to fund any travel goals, or spend more time eating out, you’ll have to find other ways to fund those endeavours, or go without them until the business can afford to pay you more. 

Additionally, you could find other forms of compensation via business perks, connections, time, freedom, and the like. Your business may even be better suited to pay for personal expenses like gas for your car, cell phone, and travel expenses. Just check with your accountant to see which expenses should be paid via the business account. 

With this method, you may still be able to get the things you need without having to draw a large salary, at least until your business is in a better state to handle it. 

3. Percentage of Profits 

Commission-based salaries are nothing new, especially in industries like real estate and insurance, but you could also go this route with your small biz.

Essentially, the harder you work, the more money you can bring home at the end of the month. As the business profits increase, so does your paycheck. 

This could be a great compromise for getting paid what you’re worth, without crippling your business by taking too much income in the beginning stages. As you’re able to hustle, connect with influential contacts, and land more clients, you can increase the amount you get paid each month based on your revenue. 

business owner

4. Based on Market Research 

What’s the going rate for someone in your position with your experience? Do you know what you should be getting paid based on the rest of the market? 

Check out sites like Salary.com or Payscale.com to determine the average salary for someone in your industry and with your services, then calculate a fair salary based on this figure. If you’re not comfortable with the amount, you can always change it so it’s a better fit. 

However, this could be a good gauge to factor in your experience, industry, and length of your career to ensure you’re paid fairly. 

5. Pay Yourself First 

This is the exact opposite of the first method because you have the mindset of creating an income-generating business from the onset. By keeping the bottom line in mind, you can strive towards getting paid what you’re worth more quickly.

Successful entrepreneur and author, Mike Michalowicz calls this the Profit First method. Instead of paying yourself last, after the rest of the expenses have been taken care of, he suggests setting aside money to pay yourself FIRST. 

It’s like the analogy of the stewardess in the airplane; you must put your own breathing mask on before helping those around you. And that’s what a small business owner does — you’re responsible for keeping the whole ship afloat, so you should be compensated well for this. 

6. Reward for Value 

Entrepreneurial writer and career expert, Alexis Grant, wrote an article warning writers to charge enough to keep making a living from their craft. In other words, you want to turn a profit and keep your expenses low, but you also have to pay yourself enough to be able to create and offer up those unique ideas. 

If you’re too busy worrying about the bills, or unable to keep a roof over your head, or food on the table, what good is your business really doing? Be an example to other entrepreneurs by approaching your salary with this strategy. 

Pay yourself enough to continue creating, without burdening your business. Service your clients at 110% by offering the best, and then rewarding your bank account. 

The Right Salary Figure as a Business Owner

These are just a few of the ways to determine how much you should pay yourself as an entrepreneur. At various times in my business I’ve implemented nearly all of them.

The important thing is to understand where your business is at, and the right salary you should be paid based on your experience and your personal beliefs.

Be open to experimenting and try different methods until you settle on one that works best. But always be open to changing your strategy, especially as you grow as an entrepreneur.

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by Carrie Smith
Carrie Smith is a financial artist and founder of The Client Connection, a matchmaking service for clients and freelancers who want to avoid job boards and instead build quality businesses. In 2013 she quit her full-time accounting job and now works as a full-time business consultant and writer. Find her on Twitter (@carefulcents).