...
In The Business For Your Success
Congratulations! You’re a small business owner. Although
you may have worked for free during your start-up days, it’s
time to pay yourself for your efforts. You generally have two
options for taking home a paycheck: a salary and/or a draw
based on the structure of your business.
Your Payday
under increased scrutiny the past several years, as they
typically prefer to take draws rather than payroll to avoid
paying the associated payroll taxes. It’s imperative for
business owners to understand the position the IRS takes
on reasonable compensation. One of the largest financial
risks to entrepreneurs is penalties and interest for incorrect
payroll-tax reporting.
If you are an officer in a corporation, the law says you must
be on the payroll and receive regular checks that include Sole Proprietors and Partners
withholdings for Social Security, Medicare, federal income Sole proprietors and members of partnerships are free to
pay themselves — or otherwise take the profits out of their
taxes, and state income taxes in states that require them.
businesses — whenever they’d like. Payroll withholdings
If your company is legally structured as an S Corporation, do not apply, but each individual essentially pays the
you must receive regular paychecks with those same equivalent on his or her reported income at tax time.
withholdings, but you also have the option of taking
additional money beyond your salary in the form of a draw For better financial organization, small-business owners
or distribution. Checks for draws and distributions are written who are sole proprietors or partners should consider
without withholding the taxes that are taken out of a regular paying themselves some kind of salary on a regular basis.
payroll check but Federal tax bills need to be accounted for A regularly scheduled payment from the business account
come tax filing season. So, how do you decide how much to to the owner helps to establish a clearer picture of what
take as a salary and how much to take as a draw?
the company costs to run. When paying yourself a draw,
you must consider the eventual tax bill. You can implement
a system as simple as keeping the