Owner’s Draws or Payroll: Which Is The Best Way To Pay Yourself In Your Business?

You went into business in the first place to make money. The traditional paycheck-to-paycheck, W2 lifestyle wasn’t for you. So you set out to do what you love, make a difference, and make a living. But one big question might be this: what is the best way to actually pay yourself in your business?

Now this might not have occurred to you yet. But, it’s a question that every entrepreneur eventually asks…

My business is making money, so does this mean that I as an individual have money?

Or in other words, as a business owner, how do I pay myself? 

Let’s talk about that right now!

There are two ways to pay yourself out the money you make in your business. You can pay yourself by taking an Owner’s Draw, or through your Payroll.

What’s the basic difference between the two, and how do you know which option is right for your company? Here’s the scoop!

The BASIC difference between an Owner’s Draw and a Payroll is this:

With an Owner’s Draw, you transfer money from your business accounts to your personal accounts.

With Payroll, you run the money through a payroll company, paying payroll taxes on it.

Now, how do you know which option will serve your company’s best interests, both now and on down the road? The answer relies heavily on these factors:

• Your business entity type (LLC, S-Corp, Sole Proprietor, etc.)

• Your available cash flow

• Profitability over the last few years

• The investments you’ve made into the business

• Personal goals

Now, there are some rules right off the bat that might make this decision for you. For example, if you’re a profitable S-Corp, you’re actually required to take what’s called a “reasonable salary.” This means you need to pay yourself a salary based on your earning capacity and available cash flow.

Sometimes, business owners transfer money directly from their business accounts to pay contractors. But the mistake comes in when they do this and call it “payroll.” This is a big no-no, especially if you do your own taxes. That’s a double bad mistake, and one that a lot of small business owners don’t know about!

(Always easy and straightforward these rules and choices are, right?)

So set things up the right way from the beginning. If you’re going to set up a legit payroll, do it properly. If you’re using basic Owners Draws to pay yourself, make sure you’re following the rules!

Want to know more about payroll? Find out the surprising benefits of setting up a payroll HERE.

Got questions about setting up payroll for your business? Let’s chat! Book a free consultation call with me HERE and we’ll sort it out!

Until Next Time,

Love, Light, and MONEY, Honey…

Kaylee