Owner draw vs. salary.

How you pay yourself depends on your business structure, and getting it wrong can have real tax consequences. Here are the basics in plain English.

Sole proprietor / single-member LLC (taxed as sole prop)

• You take owner's draws. There is no salary.
• You pay self-employment tax, roughly 15.3%, on most of your net profit, whether or not you actually draw the money out. (Technically it is calculated on 92.35% of net profit, and the Social Security portion stops above an annual cap. Your tax pro runs the exact number.)
• Draws are not tax-deductible business expenses.

S-Corporation

• You must pay yourself a reasonable salary through payroll. The IRS requires it.
• Payroll taxes apply only to the salary portion.
• Additional profits can be taken as distributions, which avoid payroll tax.
• This structure can produce real tax savings, but your CPA must help set the salary correctly or it can backfire.

C-Corporation

• Salary is a deductible business expense at the corporate level.
• Dividends are taxed at the corporate level and again personally, which is the double taxation you have heard about.
• Less common for small businesses.

Always talk to your CPA before changing how you pay yourself. What we do is make sure whatever you choose is recorded correctly in the books, so your reports and your reality match.

Can I just take money out whenever I want?

As a sole proprietor, largely yes, and those are draws. As an S-Corp you must run a reasonable salary through payroll first. The IRS requires it, and taking only distributions is one of the more commonly challenged shortcuts.

Are owner draws tax deductible?

No. Draws are not deductible business expenses. You are taxed on the profit of the business whether you take the money out or leave it in.

Should I become an S-Corp to save on taxes?

Sometimes it produces real savings, and sometimes the payroll and filing costs eat the benefit. It depends on your profit level, and it is a CPA conversation. What we do is make sure whichever way you go is recorded correctly.

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