Income and Profit

• As a self-employed person, your income is the amount that is left over after you subtract your expenses from your gross receipts. In other words, your earnings equal the amount by which your sales exceed the amount it costs your business to operate. Business expenses include labor, materials, business taxes and licenses, rent, utilities, advertising and interest on business loans. If your business expenses exceed your business sales, then you earn no income at all, even though you may have worked a heavy schedule.
  
  

Business Income and Salary

• As a business owner, you have considerable flexibility when creating an arrangement for paying yourself out of your business earnings. Some small business owners only take money out of the business when their company earns a profit, or when they desperately need funds. Other entrepreneurs arrange their books to draw a consistent salary regardless of whether the company earns a profit. If you choose the latter option, you must develop a strategy to make up for the shortfall, such as taking out loans or setting aside funds during especially profitable seasons.
  
  

Taxable Earnings

• As far as the IRS is concerned, if your business is a sole proprietorship, its net profit is the same as your taxable earnings from business activities. If you borrow money to keep your business afloat and use those funds also to pay yourself a salary, your taxable earnings may be negative even though you drew a salary. If your company is organized as a corporation, or a legal, taxable entity distinct from your individual taxable entity, then you may draw a salary that is different from the amount that the business earns because some business income can stay with the company rather than being disbursed to shareholders.
  
  

The Average Salary of Self-Employed Persons

• As a self-employed person, you have the opportunity to earn a considerable salary as well as the risk of earning less than nothing if you need to draw on personal funds to keep your company afloat.The average salary of a self-employed person does generally increase after the first few years, after you have paid off the initial costs of starting your business.