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Hello Community! Our QuickBooks blog is filled with great information for business owners and today I have a good one. We talk often about paying employees and cash flow into your business, but what about the bosses? When it’s time to pay yourself, are you paying yourself a salary, or owner’s draw? An article from our blog breaks it all down for you so you can understand your options.Let’s start with the basics: owner’s draw vs salary.
- Owner’s Draw: The business owner takes funds out of the business for personal use. Draws can happen at regular intervals, or when needed.
- Salary: The business owner determines a set wage or amount of money for themselves, and then cuts a paycheck for themselves every pay period.
There are a lot of reasons you may choose one over the other, but the most important factor is how you classify your business. The main types of business entities include:
- C Corporation (C Corp)
- S Corporation (S Corp)
- Sole Proprietorship
- Limited Liability Company (LLC)
- Partnership
There are rules for owner compensation, like if your business is a partnership, you can’t earn a salary because the IRS says you can’t be both a partner and an employee. It’s important to know this information so you make a legally informed decision.
Pros and Cons of an Owner’s Draw
Pro:
- Greater flexibility: Rather than needing to pay herself a set amount, Patty’s compensation can fluctuate depending on how her business is performing.
Con:
- Reduced funds: An owner’s draw reduces a business’s equity, which reduces the funds available for future business spending.
Pros and cons of salary
Pro:
- Less Admin Work: Taxes are deducted from your paycheck automatically. Additionally, your compensation as the business owner is a more stable expense, which makes it easier to track your income and expenses.
Con:
- Cash Flow: What happens if your business has a down month? While it’s possible to adjust your salary to give yourself some more wiggle room, your salary still needs to fall within the IRS’ definition of reasonable compensation. Plus, figuring out how much to pay yourself can be challenging.
That’s just the tip of the iceberg. Take a deep dive into salary and owner’s draw options and decide what’s best for you. Read the full article here: Salary vs. owner's draw: How to pay yourself as a business owner
