You started a business. You are making money. Nice.
Now comes the fun part: paying yourself.
You open your bank app, slide some cash from the business account into your personal one, and think, “That’ll do.” Right?
Well… maybe. Maybe not.
This is where the whole owner’s draw vs salary thing shows up and ruins the party.
Let’s break it down without making your brain hurt.
What’s an Owner’s Draw?
If you are a sole prop, partner, or single-member LLC, you’re probably taking what is called an owner’s draw.
Translation: You are pulling money out of the business because you can. No W-2. No payroll. No taxes coming out upfront. You are not on the books as an employee. You’re just moving profit to your personal account.
Sounds great, until you realize the IRS still taxes you on that money. Draw or no draw, if your business made money, you owe tax on it.
Yes, even if it is still sitting in your business account. Ouch.
What About a Salary?
If you are running an S Corp or C Corp, you do not get to wing it. The IRS expects you to pay yourself a reasonable salary, like an actual employee.
That means:
- You run payroll
- You withhold taxes
- You get a W-2
- You deal with Social Security and Medicare
Then, if there is money left over, you can take extra as a distribution. But only if you have paid yourself that “reasonable salary” first.
So… What’s the Big Deal?
If you take the wrong kind of pay, or if you mix stuff up, the IRS will not send you a thank-you note. They will send penalties. Maybe interest. Maybe an audit.
Here’s the short version:
- Draws do not get taxed when you take them… but your business’s profit still gets taxed
- Salaries lower your business’s profit… but trigger payroll taxes
- Distributions (S Corps only) are sweet and tax-friendly… after you have paid a salary
Try skipping salary and living off draws? That is how you get on the IRS’s naughty list.
Red Flags That Blow Up Later
- You call every transfer a salary, but you do not run payroll
- You have not paid yourself at all, just dipped into the business when needed
- You are an S Corp and forgot to pay yourself through payroll
- Your books show “Owner Draw,” “Owner Pay,” “Owner Loan,” and nobody knows which is which
If this sounds like your QuickBooks file, you are not alone. But it’s time to clean it up before it bites you later.
What You Should Actually Do
- Know what type of business you are running (LLC, S Corp, C Corp, etc.)
- Understand how you are supposed to pay yourself based on that
- Stop guessing and putting random transfers into random categories
- Make a real plan to pay yourself, and pay your taxes the right way
Still winging it with how you pay yourself?
Let’s fix that before it gets expensive.
Click here to talk with us. You will feel way better after.
