Did you know the average salary for an eCommerce entrepreneur is $101,464?
Some entrepreneurs choose to pay themselves a lot more or a lot less, depending on their specific individual and business circumstances.
However, regardless of whether you are just starting out or have been in business for 10+ years, it is a great idea to pay yourself a regular salary. This signals commitment, helps you track the real costs of running your business, among countless other benefits.
In this post, we’re sharing tips to help you calculate your salary.
Why should you pay yourself a salary?
The myth that eCommerce entrepreneurs should work day in and day out, build and then live off their savings, move to a cheap city/country, such as Chiang Mai, and eat Ramen Noodles and instant Oatmeal for months on end to get their business up and running is a foolish one.
While you will have to make sacrifices at the beginning, the idea that you shouldn’t pay yourself a salary for months or worse years is a recipe for problems, including personal financial hardship, loss of support from loved ones that believed in you, and burnout.
Paying yourself a salary – even just a modest one like $1,500 per month in the early days – signals commitment and can actually help you run a more profitable and scalable business.
After all, you are likely putting in more hours than you ever worked in a day job. You deserve to be compensated for the work you are doing.
What are the key factors to consider when deciding on your owner pay?
Just because you should pay yourself a salary doesn’t mean you should simply pull it out of thin air.
1. Pay yourself “reasonable compensation”
Reasonable compensation will vary depending on the following factors, including:
- Business revenue
- Business profit
- Number of employees and contractors working in the business
- Any bonuses or performance incentives for your team
- Number of hours you are working
- Your specific responsibilities and roles in the day-to-day operations
This means that if your business is newer and not yet profitable (including salaries of you and your team), then your take-home salary should be more modest.
Or, if your business is growing nicely, maintaining healthy, profit margins, and you are working on it full-time, you shouldn’t be paying yourself $1,500 per month. Instead, you deserve to make a healthy six-figure salary that is comparable to what a CEO in your position might make.
And, if your business is established and you choose to hire a full-time CEO to run the business, you might choose to forgo a salary and just take quarterly distributions instead.
2. Make sure your salary fits within your legal business structure
Is your business an S-Corp, a C-Corp, or an LLC? The way your business is legally classified has ramifications for how you pay yourself and how you are taxed.
For example, if you have an S-Corp or C-Corp, it is expected that you take a regular salary. And, S-Corps can also take an owner’s draw on top of their salary. (We’ll cover more on that in the next section.)
Whereas LLCs aren’t subject to the same rules, however, you’ll need to fill out a Form 1040 Schedule C (for solos) or a Form 1065 (for partnerships) at tax time if you are a U.S. citizen, any profit will be classified and taxed as “personal not company income.”
3. Decide on whether you want to take a salary, owner draw, or both
The two most common ways to pay yourself is either through a salary or an owner draw.
A salary is fairly explanatory. You pay yourself a set rate on a set schedule, either weekly, biweekly, or monthly. This is the same way you would pay any of your employees.
Pro Tip: Even if you have no employees and you are in the U.S., paying yourself a salary can be beneficial, especially if you are planning on a house, renting an apartment, or expect to take on financing for a personal investment in the next few years. Since banks and lenders still view entrepreneurship as riskier than a 9-5 day job, paying yourself a regular salary with W2s makes you classified as an employee instead of as self-employed.
Another way to pay yourself is through an owner draw. This allows you to pay yourself a percentage of all your company’s profits. Unlike a salary, an owner draw doesn’t require you to withhold money for Medicare, Social Security, or federal or state income taxes when they are paid out. However, you’ll still need to report that income and pay taxes at the end of the year.
4. Think through tax ramifications carefully
Your business’s legal structure, how you pay yourself (owner draw vs. salary), and how much you pay yourself all have tax ramifications.
Just like Christmas, tax season happens every year. The more planning you do upfront, the less stressful it will be.
Pro Tip: One way to make tax time even less stressful is to use the Profit First Method. You can put away a certain percentage of money in a separate bank account just for “taxes.” So, you won’t have an unpleasant surprise when your tax bill is due.
In addition, you can also be more intentional about your spending. For example, you can pay for your cell phone, home Internet (if you work from home), and vehicle expenses through the business for tax minimization.
5. Account for any team performance incentives or bonuses
This won’t apply to every eCommerce business. However, if you have any employees that have equity in the business or monetary incentives based on revenue or profit growth, you want to make sure that your personal salary is fair and doesn’t eat into what they can earn.
For example, you hired Joe to be your eCommerce sales manager. He is paid $2,000 per month as a base salary with 30% commission based on all new sales he brings in each month and generous annual performance bonuses. If Joe is a rockstar that is bringing in tons of new sales each month, you want to make sure that your salary doesn’t eat into the money you should be paying Joe.
What are the biggest mistakes that eCommerce entrepreneurs make?
Here are some of the biggest mistakes that we see eCommerce entrepreneurs make when choosing a salary, along with how to avoid them.
1. Not paying yourself a salary from the start
As we alluded to earlier in the post, not paying yourself on a regular basis is martyrdom at its best or downright sadistic at its worst. As soon as your business is generating sales, you should pay yourself a modest salary. As your business grows, you should increase your pay too.
Unless you are in a position where you don’t have to worry about money at all, pay yourself a salary from day one. And, give yourself raises or bonuses / dividends as the business grows and matures.
2. Neglecting your bookkeeping
Most eCommerce entrepreneurs didn’t start their businesses because they love accounting and finance. However, keeping accurate and timely financial reports is essential. When you neglect your books, you are setting yourself up for a host of problems, including payroll issues and cash flow shortages.
3. Not setting aside enough money to fuel growth
While you should pay yourself a reasonable salary, you also want to make sure that you aren’t artificially limiting your business’s growth unintentionally.
Note: There are some use cases where you might want to restrain growth. However, you should make that decision intentionally based on data and not by accidental circumstances.
For example, this comes up the most often when it comes to inventory forecasting and planning. Because your realized earnings happen months later, you need to make sure you have enough in the bank to order enough inventory to meet your growth/sales goals.
In sum, paying yourself a salary is a signal of commitment that you are invested in your eCommerce business. This can help you stay motivated, make better financial decisions around growing your team (and business), show investors and potential partners that you have “skin in the game,” and avoid personal financial hardships.
Whether you are paying yourself a salary for the first time or thinking about giving yourself a raise (because you earned it), the best place to start is to evaluate your monthly free cash flow and Profit and Loss Statement.
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.