Let’s tackle a question we hear often: “How much should I pay myself as an agency owner?”
Is $200,000 enough?
What about aiming for half a million, or even seven figures?
Is there a magic number or formula you can use?
Deciding your take-home compensation as an owner involves more than picking a random number. And most first-time agency owners start with a modest salary and adjust as they gain experience.
So, how do you determine the right amount? Let’s break it all down.
Establishing the Baseline
Let’s start with a baseline. For small to medium-sized American marketing agency owners, annual agency owner salaries typically range from $62,000 to $144,000.
While this might seem discouraging, it’s important to note that some individuals can earn as much as $500,000 annually.
The actual amount depends on factors such as the agency’s size, client base, location, niche, and other critical factors.
Accountants and marketing experts often suggest a more optimistic range of $100,000 to $500,000 for agency owners, particularly those with fewer than one hundred employees.
Factors Influencing an Agency Owner’s Salary
Deciding on the right salary for an agency owner isn’t a straightforward decision. It involves careful consideration and analysis of several key factors that influence what constitutes a fair and reasonable salary.
Here are a few of them:
Revenue
One of the most significant factors influencing an agency owner’s salary is how much money your marketing agency makes. For example, a $100,000 annual salary might seem reasonable from face value. However, if your firm is only making $120,000 annually, this paycheck for a single person doesn’t make sense.
Profit margin
Profit margin is the income left after deducting all expenses. Most agencies operate with a profit margin of six to ten percent, but digital agencies can reach up to 20%, and large agencies even higher. A higher profit margin typically allows for a higher agency owner salary.
Co-owners
Owning a marketing agency yourself creates a more substantial compensation than having two or more owners. For example, you could pay yourself $150,000 annually instead of splitting it 50-50 with a partner.
Cost of living
Living in major cities often means higher living costs but also potentially higher-paying clients. This influences how much you need to earn to maintain your desired lifestyle.
Although it’s important to note that your desired income probably won’t be achievable right off the bat.
Sales pipeline
Does your marketing agency have a steady income stream (recurring revenues)? Do your clients return for repeat business, or are the transactions a one-off? A stable sales pipeline enables you to earn a more handsome paycheck.
Job Nature
Agency owners who work hands-on in their businesses at least 40 hours weekly should compensate themselves with a full-time employee’s salary. On the other hand, if you’re working less than 40 hours or part-time, it makes sense to take home a lower compensation.
Tax planning
Experienced agency accountants and tax advisors might recommend lowering the agency owner’s income to leverage lower tax rates. While this approach works, it can have downsides, especially when benchmarking. We recommend working with your agency accountant to work out the best structure for your business & situation.
Personal preferences
Some agency owners dream of an extravagant lifestyle – flashy cars, numerous properties, access to exclusive events, and other high-roller activities and attributes. Others are more frugal, preferring a minimalist approach to unnecessary lavishness. While not always a factor, it may come into play when determining your salary.
The “Ideal” Agency Owner Salary
Using the factors we’ve discussed, you can start by setting a salary that feels right for your situation. Keep in mind, this number isn’t set in stone; it should be reviewed and adjusted over time to stay relevant to your business needs.
Here is a good starting point:
Pay to survive
Start by determining your annual expenses, including food, mortgage, loan payments, transportation, etc. Your salary should be at least identical to your yearly costs—you do have to live, after all.
Pay to thrive
You can increase your salary once the business picks up or you have other income streams. Your salary should cover your expenses, and you should save 20% of it for rainy days (i.e., retirement).
Pay a market wage
Your marketing agency is booming and has enough cash reserves to succeed.
Once your agency is up and running smoothly, here are the ranges we recommend based on team size:
- 1-5 people = $130,000
- 6-10 people = $200,000
- 11-15 people = $250k
- 16 – 20 people = $300k
- 20+ people = $400k
Need Extra Help Determining Your Agency Owner Salary?
Figuring out how much to pay yourself as an agency owner involves considering factors like your income, expenses, and taxes. There are a lot of complexities that we can cover in a simple blog post.
Our advice? Start with a salary that covers your basic needs and allows for savings as your business grows.
If you need additional guidance, we’re always here to help.
At Agency CPAs, we specialize in helping agency owners make these decisions. We make sure your salary covers your living expenses, benefits you from a tax perspective, and doesn’t strain your business’s finances.
Simply head over to our Contact Page to schedule a call and find out how we can help.
Until next time!
