The Skinny on Owner’s Draw for Small Business

HR Tech

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What’s an “owner’s draw” and how does it work to benefit the business and the owner? Owner’s draw, or simply draw, is money taken out of the business to pay or repay the owner – either for work performed or for funds provided to get the business started or keep it going. Most small businesses begin with a capital investment from their owners: a sum of money to buy equipment, advertising and more. This capital is a loan to the business from which the owner can “draw” funds, as needed for repayment. 

What’s the difference between draw and salary?

Draw, when taken by the owner, is a deduction from the business’ capital. Owners and partners can take out any amount of money they choose to reimburse themselves from the business account when they take a draw. There is no payroll tax on the amount they take as they are essentially repaying a loan to themselves.

Salaries are structured differently: owners are required to pay the necessary payroll and FICA taxes if they structure their business to pay them a salary. The tax implications can be significant: in addition to payroll taxes incurred by the business, employee-owners will be subject to income tax

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