Small Business Owners: Salary vs Draw

Why small business owners should consider putting themselves on salary.

Small business owners are free to pay themselves, or otherwise take the profits out of their business, whenever they’d like. Usually as a “draw.”

Many small business owners prefer to utilize a draw because payroll withholdings do not apply.

However, each individual essentially pays the equivalent on his or her reported income at tax time.

Pay now versus pay later.

When paying yourself a draw, you must consider the eventual tax bill.

If you currently utilize a “draw” as your method of compensation, you have probably implemented a system to:

1.) Set aside an estimated amount of cash today for taxes later.
2.) Write monthly checks to the IRS.
3.) Or are making quarterly estimated tax payments.

Estimates can be a stressful way to live!

Some business owners may not even use a “draw,” and simply use their company account as a piggy bank to live off of.

Doing so leaves business owners in a bind if they spent more on non-deductible living expenses than they have left in their account for taxes at the end of the year.

For better financial organization, owners of single-member LLC’s sole proprietors or partnerships should consider paying themselves some kind of salary on a regular basis.

By putting yourself on salary with a PEO, you could deduct all wages and applicable employment taxes with a single invoice for each payroll.

Our payroll invoices are not estimates, but exact, based on wages paid.

Estimates versus exact.

A regularly scheduled payment from the business account to the owner helps to establish a clearer picture of what the company costs to run.

By having taxes withheld on personal wages over the course of the year, you may not have to come up with any additional money for income taxes at the end of the year.

You could even get a tax return!

You could optimize your business tax strategy by directing the more clearly recognize business profits at the end of the year back into your business with tax-deductible expenses. Or pay yourself a bonus!

Putting yourself on salary with taxable wages also shows income to banks, improving your ability to obtain financing.

Withholding social security could be helpful when it comes time to retire!

It’s a significant milestone when a business becomes profitable enough that you can be paid for your efforts!

Stop estimating tax bills, putting money aside in envelopes!

Remove the temptation to use those estimated funds that you would have otherwise set aside!

Sleep well at night knowing that your employment taxes are correctly billed, withheld, and distributed on your behalf with each payroll.

Graduate from small business pitfalls, and re-position yourself with big business financial structure and strategies!

Give us a call to discuss our solutions!

Eagle Employer Services