Paying yourself - Owner’s Draw vs Salary
You work hard in your business - so you should be paying yourself! If you are unsure how to pay yourself, you are not alone. Making the correct choice for you and your business will help you save on taxes, maximize cash flow, and maintain tax compliance.
There are two types of payment methods for small business, Owner’s draw and Salary. Below explains the difference between the two and which is right for you.
Owner’s Draw
An owner’s draw, also known as a distribution or withdrawal, involves taking money out of your business’s profits for personal use. It’s a flexible method of paying yourself, as you can withdraw funds whenever needed.
Owner’s draws are not subject to payroll taxes, however you’ll still owe income taxes on the withdrawn amount.
For sole proprietors, owner’s draw is the only option for payment.
Salary
Paying yourself a salary involves setting a fixed amount of compensation that you receive on a regular basis, such as weekly, bi-weekly, or monthly.
Unlike owner’s draws, salaries are subject to payroll taxes.
Paying yourself a salary requires employing yourself as a W-2 employee of your business and requires additional administrative tasks, such as payroll processing and tax filings.
Owners of S-corps and C-corps must pay themselves salaries.
Is it better to take a draw or salary?
It depends! Remember, if you are a sole proprietor your only option is an owner’s draw and if you are an S-corp or C-corp you must take a salary. However, if you are an LLC you may choose your payment method. The best way to decide which is best for your LLC is based on your net income. When your business is generating enough profit to pay yourself a reasonable salary and when the payroll tax burden is less than the self - employment tax, it is time to switch to a paid salary. This point will vary depending on individual business circumstances.
For more information on business types check out my blog post: Sole Proprietorship vs LLC vs S-Corp.
