How to Pay Yourself as a Small Business Owner: Owner's Draw vs Payroll

💰Owner's draw allows small business owners to take funds out of their business for personal use.

💵Payroll involves receiving a set wage and regular paychecks as a small business owner.

🧩Consider the structure of your business, tax deductions, and cash flow when deciding between owner's draw and payroll.

💡Owner's draw does not have tax deductions, while payroll automatically withholds taxes from your paycheck.

📊Consult with a trusted accountant or tax professional to determine the best payment method for your small business.

What is owner's draw?

—Owner's draw allows small business owners to take funds out of their business for personal use. It can be in the form of regular checks or cash withdrawals.

What is payroll?

—Payroll involves receiving a set wage as a small business owner, and regular paychecks are issued, including taxes and other deductions.

How do I decide between owner's draw and payroll?

—Consider factors such as your business structure, tax deductions, and cash flow. Consult with an accountant or tax professional for personalized advice.

Does owner's draw have tax deductions?

—No, owner's draw does not have tax deductions. The draw is not considered an expense for tax purposes.

Do I need to make estimated tax payments if I take owner's draw?

—Yes, if you take owner's draw as a small business owner, you need to make estimated tax payments to cover your tax liability.

00:00Introduction to paying yourself as a small business owner and the importance of making informed decisions.

01:31Explanation of payroll salary and how it involves determining a set wage and receiving regular paychecks.

02:01Definition of owner's draw as the act of taking funds out of the business for personal use.

03:13Importance of understanding deductible expenses and their impact on owner's draw.

04:24Discussion of how owner's draws are not tax-deductible and may increase taxable income.

05:12Example of a small business owner's scenario choosing a combination of payroll and distribution as payment methods.

06:00Explanation of how owner's draws impact equity and potential tax implications.

08:47Overview of best practices for paying yourself as a small business owner, including understanding business classification and consulting with professionals.