TL:DR – Overview
- Ecommerce business owners in the United States earn an average of $101,464 per year with a take-home pay of approximately $6,900 per month. (Comparably)
- Top earners in the 90th percentile of U.S. ecommerce business owners can rake in as much as $400,000 annually. (ZipRecruiter)
- Ecommerce business owners who earn an average salary will be aligned in the 24 percent federal tax bracket and can anticipate a take-home pay between $80,000 and $90,000. (Comparably)
- The top four states with the highest number of recorded ecommerce business owner salaries are California, Pennsylvania, New York, and Texas, respectively. (Zippia)
- Shopify ecommerce business owner salaries trend slightly higher than the national average, with an estimated total pay of $179,903 per year. (Glassdoor)
- The bottom 10th percentile of ecommerce business owners earns under $63,000 per year. (Zippia)
3 ways for ecommerce entrepreneurs to pay themselves
As an ecommerce entrepreneur, you navigate dozens of administrative, financial, and operational tasks each day. So, shouldn’t you be paid appropriately (and proportionately) for your hard work? Fortunately, there are three common methods for you to earn income from your online storefront:
- Owner’s draw
- Dividends and capital gains
The payment method you chose for your ecommerce business will rely on several factors, including your current business structure — like whether you operate as a sole proprietor, a partner, an LLC, or an S-Corporation — and the potential tax implications you may face if you begin to earn a salary.
Whether you opt for an owner’s draw, a salary, or dividends and capital gains (or even a combination of all the above), consider these three ways ecommerce entrepreneurs pay themselves.
1. Owner’s draw
As the name might suggest, an owner’s draw payment method is common among sole-member limited liability companies (LLCs) and sole proprietorships in which just one individual is considered the owner. This is also typical in start-up mode when the amounts available to take for yourself are so up in the air. If your ecommerce operation is registered as either business structure with you at the helm, you can “draw” a percentage of your company’s profits in an owner’s draw.
Because you are the sole owner, you can draw as much money as frequently as you desire; however, each draw will reduce your capital account or the money you personally invested in your business. Likewise, you will not be required to withhold money for Medicare, Social Security, or federal or state income taxes on your owner’s draw, but you will need to pay those taxes at the end of the year.
Pros of an owner’s draw
- No tax withheld. A lack of Medicare, Social Security, or federal or state income tax withheld means you receive the entire amount of the draw.
- Fast and easy. As the sole owner, you write yourself and check and deposit it into your personal checking account to receive funds immediately.
- Unlimited (almost). So long as your business is generating profit, you can draw as much money as often as you want (without risking business health).
Cons of an owner’s draw
- Personal income taxes. All owner’s draws are taxed as personal income, so you will be expected to pay Medicare, Social Security, or federal or state income taxes come tax season.
- Minimal paper trail. Aside from personal checks, you will not have personal income on paper to utilize as evidence of profitability for personal loans or home mortgages.
- Reduces capital account. Each owner’s draw decreases your total capital account, which reduces how much money you’ve invested into your ecommerce operations.
The salary payment method is common among ecommerce businesses that are structured as an S-corporation or C-corporation. If your business is registered as an S-corp, you are legally bound to pay yourself a reasonable salary, as your business income and losses are passed to you and other shareholders. If you are a C-corp, you can opt for a monthly salary to streamline your tax burden.
With a salary, you pay yourself a fixed rate on a set schedule, such as weekly, biweekly, or monthly, the same way you would pay your employees. If you are an S-corp, your salary comes directly from your business profits, and any remaining profit is passed to your shareholders as distributions. Bear in mind, every salary will withhold Medicare, Social Security, or federal or state income taxes.
Note: We recommend using a payroll software, like Gusto, since it will automatically handle some of the most tedious payroll and payroll tax obligations.
Pros of a salary
- Stable source of income. Because your salary is based on a fixed amount on a set schedule, you can predict your exact income amount each month for better personal forecasting.
- Simplifies bookkeeping. The predictability of recurring salary amounts (both for personal income and business expenses) streamlines ongoing bookkeeping efforts.
- Plans for the future. A steady salary allows you to begin investing your funds into future life plans, such as a 401(k) retirement plan.
Cons of a salary
- Limited lift in income. Your recurring salary is established on a fixed rate and schedule, which can leave you in a bind if your personal expenses suddenly spike.
- Difficulties in deciding on a “reasonable” salary. The Internal Revenue Service (IRS) anticipates that you will pay yourself a “reasonable” salary, which is not too high or too low.
- Potential tax burden. Similar to an owner’s draw, salaries are considered 100% taxable personal income, which can become quite costly come tax season.
3. Dividends and capital gains
Another popular payment method among S-corp and C-corp business owners, as well as business partnerships, are dividends and capital gains. Dividends refer to all profit extracted from a company after all liabilities, including necessary taxation, have been covered. Dividends can be extracted in as large of amounts and as frequently as necessary, but they must be approved by all shareholders.
Capital gains refer to an increase in asset value relative to the price originally invested. For instance, ecommerce entrepreneurs can earn income from capital gains by selling the stocks they initially invested in. Depending on your business structure and size, you may prefer to pay yourself a modest salary and supplement your income by regularly extracting dividends and capital gains.
Pros of dividends and capital gains
- Save on taxes. Dividends are typically taxed at a lower rate than salaries, so you can save significant money around tax season.
- Simple payment and bookkeeping. Once approved by shareholders, you can pay yourself in dividends by writing a check and cashing it in your personal account.
- Flexibility in frequency and amounts. You can choose to extract dividends as often as you want for as much as you want, either in cash, stock, or other assets.
Cons of dividends and capital gains
- Unique tax considerations. You may need to file a Form 1099-DIV with the IRS for dividends as well as pay a capital gains tax for profit made on investments such as stocks.
- Lack of personal income. Unlike an owner’s draw or salary, dividends do not count as personal income and could impact your paper trail for potential lines of credit.
- Require shareholder approval. Because dividends require the green light from shareholders, you cannot receive your money until your team approves it.
General ecommerce business owner salary ranges
Now that you understand how to pay yourself as an ecommerce business owner, you may be wondering just how much you should be getting paid. What does a “reasonable” amount mean, anyway? Generally speaking, you want to aim within the average salary range for fellow owners.
The average annual income for an ecommerce business owner is $101,464, with a take-home pay of approximately $6,900 per month. After the appropriate federal taxes have been withheld, the average annual salary equates to between $80,000 and $90,000 (not including potential state tax).
The majority of ecommerce entrepreneurs ultimately earn a take-home salary between $72,000 to $92,000 per year. While top earners can make upwards of $400,000 annually, those in the bottom 10th percentile earn under $63,000 per year. Overall, the average salary range varies significantly.
10 U.S. states where ecommerce entrepreneurs pay themselves the most
When it comes to the states where ecommerce entrepreneurs pay themselves the most, a major deciding factor in final payment is the current cost of living. Of the ten most expensive states to live (and do business) in, almost half are the states where entrepreneurs earn the highest salaries.
- New York ($110,413)
- Pennsylvania ($103,409)
- Virginia ($102,637)
- Delaware ($101,473)
- Maryland ($101,116)
- Connecticut ($100,982)
- Rhode Island ($99,792)
- Michigan ($98,442)
- West Virginia ($98,240)
- North Carolina ($98,178)
* As of June 2023, according to Zippia
10 U.S. states where ecommerce entrepreneurs pay themselves the least
While Hawaii is actually considered the state with the highest cost of living, the sheer logistics of doing business out of the Hawaiian islands means that ecommerce entrepreneurs often take a pay cut. Other elements that impact business owner profitability include state and county taxation laws.
- Hawaii ($54,080)
- Montana ($76,099)
- Kansas ($77,209)
- Iowa ($79,360)
- Wyoming ($79,724)
- Florida ($80,920)
- North Dakota ($81,058)
- Colorado ($81,398)
- Idaho ($81,507)
- Utah ($81,826)
* As of June 2023, according to Zippia
Whether you want to pay yourself a salary for the first time or paying yourself far below market rate and want to fix it, a great first step is to analyze your Profit and Loss Statement. Then, set a goal for how much you want to be paying yourself in the future. Once you know your baseline, where you stand today and where you want to get to continue each quarter to bump up the rate to get you closer and closer to the desired pay as the business grows.
Whether you want help analyzing your P&L statement or additional advice on the best salary structure for your business, we can help. Schedule a free call with a Bean Ninjas team member today.