Draws or Distributions
One of the most common ways that small business owners pay themselves is through draws or distributions. Essentially, this means that the owner takes a portion of the business’s profits as a regular payment. This method is often used by businesses that are structured as sole proprietorships, partnerships, or limited liability companies (LLCs). Pros:
- Quick and easy to set up
- No need to withhold taxes
- Flexible payment schedule
Cons:
- Income is not guaranteed
- May not be able to take draws during slow periods
- May need to pay estimated taxes
Salary
Another option for small business owners is to pay themselves a salary, just like any other employee. This method is often used by businesses that are structured as corporations. The owner would be considered an employee of the corporation and would receive a regular paycheck with taxes withheld. Pros:
- Steady income
- Ability to take advantage of employee benefits
- May be able to deduct business expenses
Cons:
- May be subject to payroll taxes
- May be more complicated to set up
- May require additional record-keeping
Owner’s Draw and Salary Combination
In some cases, small business owners may choose to combine the draw/distribution method with a salary. This can provide a more stable income while still allowing for the flexibility of taking draws as needed. Pros:
- Steady income with the option for additional draws
- Ability to take advantage of employee benefits
- More flexibility than a straight salary
Cons:
- May be subject to payroll taxes on salary portion
- May require additional record-keeping
- May need to pay estimated taxes on draws
Conclusion
Deciding how to pay yourself as a small business owner can be a challenging decision. It’s important to consider the structure of your business, your personal financial needs, and the tax implications of each method. By weighing the pros and cons of each option, you can make an informed decision that works best for you and your business.