Do I Put Myself on Payroll? Compare Owner’s Draw vs. Salary

Entrepreneurs who launch a small business embark on a journey that often includes a learning curve. Decisions need to be made as the company evolves, and one of the major questions revolves around getting paid. Starting an operation requires a significant financial investment, giving owners a financial share at the expense of using up resources.

In terms of putting money in your pocket, you have options that include reclaiming that money as an “owner’s draw” or establishing a salary for services rendered. It’s important to understand the salary vs. owner’s draw differences and how they impact your tax liability and ownership share. We hope the following helps you make an informed decision about the owner’s draw vs. salary distinction.

What is an Owner’s Draw?

Consider a scenario where you invested $100,000 to start a small roofing company. You formed an LLC and transferred the money into a business account. Then, you wrote checks or used a business debit card to acquire the tools and trucks, hire workers, lease an office, purchase workers’ compensation insurance, and other business-related costs.

Six months later, you haven’t taken a nickel out of the business. Your savings are dwindling, and you need an income. Business owners have the option of withdrawing their investment incrementally or as a lump sum. Money taken out of the roofing company as an owner’s draw will not be subject to taxes, meaning no deductions will be taken.

How Does Taking a Salary Work?

A small business owner’s salary is no different from anyone else’s. You can enlist the support of a payroll service provider that will calculate and withhold the state and federal deductions and cut you a check. The payroll service provider typically sends the IRS its money, making tax time less stressful. Salaries go a long way to paying personal bills and buying confidence in your start-up.

How Does Business Entity Type Impact an Owner’s Draw or Salary

The way you structure your business has wide-reaching financial implications. A sole proprietorship, for example, effectively limits owners to only taking a draw. That’s because the entity and individual are not considered separate and distinct. Business and personal profits are the same, and they flow through to your tax return. This is how other entities impact the owner’s draw vs. salary dynamic.

• Partnerships: As an investor, you can take an owner’s draw without having taxes withheld. However, a draw in lieu of a salary could reduce your stake in the company.
• S Corps: It’s feasible to do a mixture of a draw and salary when operating a company that is separate and distinct from the owner. If you are the only stakeholder, the owner’s draw reduces the taxed amount, putting more immediate cash in your pocket.

The rules regarding limited liability companies (LLCs) differ from state to state. That being said, owner’s draws and salaries generally adhere to the taxable and non-taxable principles mentioned above.

Benefits of Putting Yourself On Payroll

It’s important to keep in mind that an owner’s draw is not actually tax-exempt. The truth of the matter is that you have already paid taxes on the money. Investing it in a small business is akin to placing money in a savings account. It does not generate interest, although the business venture could grow into a lucrative opportunity, particularly if you tap into government-funded projects. Accountants generally agree that it’s in an owner’s best interest to go on payroll as soon as possible for the following reasons.

• Earning a salary helps improve your credit score and borrowing ability.
• Social Security withholdings increase your retirement benefits.
• Going on payroll motivates owners because they experience a measure of financial success.

As a business leader, it’s also essential to know if owners are exempt from workers' compensation. Many states don’t require sole proprietors to carry workers' compensation insurance. Those with a state-specific number of employees must take out a policy. If you are a stakeholder who also works for the business entity, check the state guidelines. Some states base workers' compensation status on ownership percentage. Of course, operating a business without workers' compensation puts owners-operators at risk.

SPLI Handles All Your Payroll Needs

At Southeast Personnel Leasing Inc., we work diligently with business owners to help them make informed decisions about issues such as taking an owner’s draw or salary. We handle payroll needs so that owners can focus on goal achievement. If your business would benefit from outsourcing payroll and other administrative tasks, contact SPLI today, and let’s get the process started.

LEGAL DISCLAIMER:

The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.  Information on this website may not constitute the most up-to-date legal or other information.  This website contains links to other third-party websites.  Such links are only for the convenience of the reader, user, or browser; we do not recommend or endorse the contents of the third-party sites.

Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter.  No reader, user, or browser of this site should act or refrain from acting on the basis of information on this site without first seeking legal advice from counsel in the relevant jurisdiction.  Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.  Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors, contributors, contributing law firms, or committee members and their respective employers.