If you’ve recently launched a business, or even if you’ve been running one for years, you’ve probably asked yourself this question: Should I pay myself a salary or just take money out of the business?
The answer isn’t just about preference. It affects how much you pay in taxes, how your business is structured, and how the IRS views your income.
Let’s break down the difference between an owner’s draw and a salary, when each applies, and how to choose the most tax-efficient option for your situation.
What Is an Owner’s Draw?
An owner’s draw is when you take money out of your business for personal use. There’s no payroll involved and no formal paycheck. This method is common for sole proprietors, partners, and owners of single-member LLCs.
You’re essentially “drawing” from the business’s profits. It’s simple, flexible, and doesn’t require a payroll provider—but it doesn’t mean you’re skipping taxes. You still pay self-employment taxes on the business’s net income, regardless of how much you actually take as a draw.
Best for:
- Sole proprietors
- Partners in a partnership
- Single-member LLCs (not taxed as an S Corp)
What Is a Salary?
A salary is a fixed, recurring payment you receive as a W-2 employee of your business. If your business is taxed as an S Corporation, and you perform work for the company, the IRS requires you to pay yourself a reasonable salary.
This salary is subject to payroll taxes like Social Security and Medicare. However, once you pay yourself that reasonable salary, additional business profits can be distributed as dividends, which are not subject to self-employment tax. That’s where real tax savings can happen—if the salary and distributions are structured properly.
Best for:
- S Corporation owners
- LLCs that elect to be taxed as an S Corp
- C Corporation owners working in the business
Key Differences: Tax and Compliance
1. Taxes
- Owner’s Draw: You pay self-employment tax on all business profits.
- Salary: You pay payroll taxes only on your wages. Distributions are exempt from self-employment tax.
2. Legal Requirements
- Owner’s Draw: No payroll system required.
- Salary: Required for S Corp owners doing work for the business.
3. Flexibility
- Owner’s Draw: Withdraw funds when you want.
- Salary: Must follow payroll schedule and file payroll tax reports.
4. Risk and Compliance
- Owner’s Draw: Simpler but higher overall tax liability.
- Salary: Lower taxes, but the IRS requires that salary be “reasonable.” Too low, and you risk penalties.
Which One Should You Choose: Owner’s Draw vs Salary.
It depends on how your business is structured and how much you’re earning. If you’re just starting out as a sole proprietor or LLC, a draw might be the easiest option. But as your income grows, the self-employment tax can start to eat into your profits. At that point, it may be worth forming an S Corporation and paying yourself a reasonable salary, then taking the rest as a distribution to reduce your overall tax burden.
This strategy is legal, widely used, and endorsed by tax professionals, as long as the salary is reasonable. Paying yourself too little in an attempt to avoid taxes could result in penalties if the IRS decides to audit your compensation.
Pay Yourself with Ease and Efficiency with Anderson Bradshaw
The way you pay yourself isn’t just a bookkeeping detail, it’s a tax strategy. Choosing the right method can help you save thousands of dollars each year, but it requires careful planning and compliance with IRS guidelines.
At Anderson Bradshaw Tax Consulting, we help business owners structure their compensation in a way that’s both tax-efficient and audit-proof. Whether you’re transitioning to an S Corp or optimizing your current strategy, our team can guide you through the right approach based on your income, goals, and risk profile.
Want to know if you’re paying yourself the smart way? Schedule a consultation with our tax experts today.
Call us at 877.550.3911 or visit www.AndersonBradshawTax.com to learn mor
