Are you a sole proprietor, a partner in a partnership, or part of a limited liability company (LLC)? If so, you need to carefully consider how you take money out of the business entity. If you are unsure of how to go about paying yourself as a business owner, use the tips and information found here.

Options for Paying Yourself

There are several options for a small business owner when it comes to paying themselves. One is to receive a salary. This is a common option for many business owners. Another option is to take an owner’s draw for compensation.

What Is the Owner’s Draw?

Often called just a draw, the owner’s draw refers to an owner who takes funds out of the business for their personal use. There are some business owners who compensate themselves using a draw, instead of paying themselves an actual salary.

You have the option to withdraw profits that have been generated by the business, or you can take the funds out that the owner contributed previously for company operations. Sometimes, the owner’s draw is a combination of the capital contributed and the profits.

If you opt to draw profits from the company, this is taxable as income. It must be reported on your personal tax return and the owners are required to pay self-employment taxes and estimated tax payments on these draws.

Is Receiving a Salary the Best Option?

You may make the decision to pay yourself a salary, instead of taking the draw. An advantage offered by this option is that the benefit payments and tax withholdings will be taken from your gross pay and this is done automatically.

As a Business Owner, How Much Pay Should You Receive?

As a small business owner, you are responsible for paying self-employment taxes and income taxes using a draw or a salary. The decision you make regarding how you receive compensation needs to be based on the amount of money your business requires to operate moving forward. It is also dependent on if you are willing to do more on your own regarding tax planning, which is necessary if you opt for the draw method.

As a small business owner, you need to pay for yourself. However, there are several options you need to consider. Be sure to figure out which one best suits the needs of your business to ensure you make the right decision for your needs and the needs and growth of your business.