Owner’s Draw vs. Salary: How Small Business Owners Pay Themselves

What is an owner’s draw?

An owner’s draw is money a sole proprietor, single-member LLC or partnership owner takes from the business for personal use. It is not an expense and doesn’t reduce business profit. It’s recorded in an equity account. The owner is taxed on business profit regardless of how much is drawn.

What is an owner’s salary?

Owners of S corporations (including LLCs that elected S corp status) who work in the business generally must pay themselves reasonable compensation through payroll. That salary is subject to withholding and payroll taxes and is reported on a W-2. Additional profit can then be taken as distributions.

Draw vs. salary at a glance

The right method follows your tax classification, not personal preference.

• Sole proprietor / single-member LLC: owner’s draw
• Partnership / multi-member LLC: draws or guaranteed payments
• S corporation: reasonable salary via payroll, plus distributions
• C corporation: salary via payroll; profits paid as dividends

How to record it correctly

Draws should be coded to an Owner’s Draw equity account — never to an expense like “Wages” or “Personal.” Owner payroll should run through a payroll system so payroll liabilities are tracked and deposited on time. Distributions get their own equity account.

Mistakes to avoid

Paying personal bills straight from the business account without recording them, S corp owners taking only distributions and no salary, and recording draws as expenses — which understates profit on the books and leaves your CPA to untangle it. Payroll tax deposit penalties can be steep; see the IRS penalty figures.

How much to pay yourself, and whether an S corp election makes sense, are tax questions for your CPA. Tejas Bookkeeping doesn’t prepare or file tax returns, but I set up and run owner payroll and keep the books consistent with whatever your CPA recommends.