Are You Wondering How To Pay Yourself As A Small Business Owner?
There are two ways that small business owners can pay themselves. As an Owner's Draw or as a Salary.
So which one do you take?
It depends on your business structure.
Sole proprietor's, LLCs and partnerships will take an Owner's Draw.
An Owner's Draw is a form of compensation that allows the owner to take money from their business without having to pay taxes on it. This can be done with or without any restrictions on how much money you can take out at once. These payments are not an expense, they go on the balance sheet.
Corporations and S-Corps have to take a salary.
The difference between the two is that a salary is taxed at your normal income tax rate while an Owner's Draw is not. The salary is typically set at a reasonable rate. What is "reasonable" can vary depending on the industry. These payments are business expenses, they go on the profit and loss statement.
S-Corp owners can also take draws (aka distributions) in addition to being paid their reasonable salary.
These draws are not subject to self-employment taxes. The reason for this is that the income has already been taxed. I hope this information helps you when you're ready to pay yourself.
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