Owner’s Draw: How To Pay Yourself From Your Business

Understanding Owner's Draw: The Simple Way to Pay Yourself as a Business Owner Transcript

You're the heart and soul of your business. You wear a hundred hats and juggle endless to-do lists. But when it comes to paying yourself, things can get a little confusing.

Enter the owner's draw.

An owner's draw is a simple, flexible way to pay yourself and lets you take money directly from your business for personal use.

When you use an owner's draw, it's kind of like rewarding yourself for all the hard work of running your own business. But here's the thing, it all depends on your business structure.

If you're a sole proprietor, the owner's draw method is generally the way to go, especially if your business is just starting out. Once your business grows and stabilizes, you can explore a combination of salary and draws.

In a partnership, owner's draws can ensure that each partner gets a fair share of the profits and it's a practical way to avoid the pressure of supporting multiple salaries right away. Just remember, taking too much too often could put your cash flow at risk. Balance is key.

For those of you running not-for-profits, the story changes. Owner's draws can raise red flags with the IRS, so it's usually best to stick with salaries to track labor costs cleanly and stay compliant.

If you're a single-member LLC, the draw method gives you control over your profits. But for larger LLCs or if you're operating in a state with high tax regulations—you might consider opting for a salary instead.

S Corporation owners must take income through a salary, although you can receive distributions, which are nontaxable and limited. However, this must be managed carefully to avoid penalty.

For C-Corp owners, your income must come through a salary, and distributions are not only taxable but can also lead to double taxation.

Wondering whether to take an owner's draw or a salary? Here's the breakdown: a draw gives you flexibility, but taxes aren't withheld—so you're responsible for paying those later.

Now, how much should you take? Ask yourself these questions.

How much cash does my business have?

Will I have enough left over to cover upcoming expenses?

Then set a reasonable number that works for both you and your business.

No matter what your business structure is, paying yourself shouldn't be stressful. Paychex can help you simplify payroll and get paid the right way. Leave the payroll stress to us and pay yourself with confidence.