We all dream of having our own business, being the boss, and controlling our own destiny. I can assure you the dream is indeed possible. But will that dream, and future success be enough? How much do small business owners really make per year? And will it be enough to support them, their families, and their ideal lifestyle?
There are multiple factors affecting an entrepreneur’s annual income. Some are within the owner’s control while others are not.
Today, we will discuss how much a small business owner can expect to make per year.
Experience and Expertise
To me, the number one component in determining income is the experience or expertise brought by the owner to the business.
Starting a new venture can be difficult at best. But without solid experience and knowledge to rely on, the odds of success drop like a rock. A photographer with years of experience has a built-in advantage, while the wedding planner who has never planned a wedding is in trouble. Even if a customer fails to notice a lack of expertise on the first encounter, it will become evident over time and the chance of repeat business will suffer.
The business owner’s inexperience can influence interactions with customers and employees. An example would be not being able to deal with production or service issues. Or it could be as simple as communicating clearly with a potential customer. Managed correctly, the client places an order. Incorrectly, and the same client takes his business elsewhere.
There can be exceptions, but experience is a key indicator of owner success in business and resulting income.
Payscale puts numbers to this with the following variations in annual salary based on experience:
- Less than one year = $58,000
- One to four years = $60,000
- Five to nine years = $57,000
- Ten to nineteen years = $62,000
- Twenty plus years = $75,000
Without question, the type of business chosen has a profound effect on an entrepreneur’s income.
Glassdoor lists information technology, media and communications, management and consulting, and retail and wholesale as the top-paying industries for small business owners. And this makes sense.
The CPA firm stands to generate greater revenue than an auto parts store. Likewise, an engineering consulting firm should produce more income than a corner convenience store. The machine shop turning out high-quality components brings in higher sales than a smoothie stand.
Zengig puts data to this concept and offers the following average salaries by profession:
- Accountant = $68,750
- Attorney = $120,000
- Copywriter = $68,920
- HVAC technician = $52,640
- Midwife = $111,100
- Plastic surgeon = $320,000
- WordPress developer = $79,200
By no means am I belittling or disrespecting low-tech businesses. Consumer demand exists for products and services of all types. The industrious entrepreneur will recognize a gap in the market and react to fill it. My point is small businesses providing a product or service requiring professional preparation or vocational skill have a greater opportunity to produce more owner income than services offered at a much lower price point.
Marketing and Sales
Call it marketing, promotion, or sales. Whatever name we give it, it’s a critical piece of the puzzle in producing owner income.
Sadly, it is often the most neglected aspect of a small business. Too many owners are so busy running their business, they don’t have time to promote their business.
There is another reason some owners are hesitant in marketing their small business. They are introverts by nature. Meaning, that they became engineers, accountants, tradesmen, etc. because they simply weren’t comfortable interacting with people. They’d rather stay in the background “working” with their laptops and spreadsheets instead of drumming up customers. This is doing their business a great disservice.
A business could have the best product at the best price and still not sell a single unit. Why? Because future customers simply don’t know it exists.
Sales and marketing are essential for business success and the creation of income for the owner. Time must be allocated, and effort made to foster sales growth now and in the future.
State and Local Economy
As individuals, we have no control over the national economy. However, from Washington to Main Street, we are painfully aware of how it affects us. More so for small businesses. The local economy impacts a business’s operating cost, as well as the business’s potential revenue.
Some states rely on agriculture while others are centers of technology. Some have huge investments in oil and others in heavy industry. The local economy is heavily influenced by the type of businesses in that area, and this spills over into employment rates and disposable income, which then impacts a business’s potential sales revenue.
Zippia’s data shows the average business owner salaries in Washington, New Jersey, and New York are the highest in the U.S. The lowest average business owner salary states are Georgia, Kentucky, and South Carolina.
The legal structure of a small business determines a business owner’s liability and how income tax is calculated for the business and its owners. Some small business owners like the simplicity of pass-through taxation, which is how a Sole Proprietorship, Partnership, Limited Liability Company, and S Corporation are taxed. But for other entrepreneurs, the tax benefits of incorporating as a C Corporation offer more financial advantages.
Tax advantages of an LLC:
- Single-member LLCs are taxed as Sole Proprietorships by default.
- Multi-member LLCs are taxed as Partnerships by default.
- LLC members may elect to have their LLC treated as an S Corporation for tax purposes.
- LLC members may choose how their business will divide the company’s profits and losses among its owners allowing for members to consider not only money invested but time and work invested when distributing profits.
Tax advantages of a C Corporation:
- A C Corporation’s profits get taxed at the corporate income tax rate. In some circumstances, that might work in the business owners’ favor.
- Depending on the location and shareholders’ personal tax situation, they might find the corporate tax rate will cost them less than if they were set up as an LLC.
- As a C Corporation, the business may be eligible for more tax deductions than if it were an LLC, Partnership, or Sole Proprietorship.
- Eligible C Corporations may be taxed as an S Corporation enabling them to avoid the sting of “double taxation.”
Tax advantages of an S Corporation:
- Only income paid to LLC members on the payroll is subject to self-employment taxes.
- Profits paid as distributions are not subject to Social Security and Medicare taxes so LLC members may find that the S Corporation election lowers personal tax burden.
- As an S Corporation, a corporation’s profits and losses flow through to shareholders’ personal tax returns and are taxed at the individual tax rates.
- The corporate entity does not pay income tax.
- Shareholders who are employees of the C Corporation only pay self-employment tax on the wages or salary that the Corporation pays them.
- Dividend income paid to shareholders is not subject to self-employment tax; those monies are taxed as either ordinary income or qualified dividends.
What’s right for your business? We encourage you to ask that question to an experienced business accountant or tax advisor who understands your situation and can give you professional tax advice tailored to your circumstances and goals.
What’s the Real Income Opportunity?
The title of this article promised some clarity regarding small business owners’ income. However, we’ve shown there are too many variables involved to provide a nice, neat one size fits all answer.
While ZipRecruiter is seeing annual salaries as high as $339,500 and as low as $25,500, the majority of United States small business owner salaries range between $92,000 (25th percentile) to $145,500 (75th percentile). Top earners, or those in the 90th percentile, are making $293,500 annually. But that said, there is nothing to say a successful small business owner cannot make $300,000, $400,000, or even more per year. That’s the beauty of entrepreneurship – there are no limits.
My advice for you is to control what you can, prepare for what you cannot, and keep pushing to make your dream come true. The money will follow.