How an Owner’s Draw Stacks up Against a Salary (As an S-corp)

At some point, there are two essential questions all business owners ask themselves: 

1. How do I pay myself? 
   
2. And, how much can I pay myself?
   

Owning a business means you get to manage many moving parts and learn new things you may have never thought about before—for example, payroll. You don’t have to know everything and then some, but there are fundamental pieces worth taking the time to explore and learn. 

On most business owners’ minds is payroll versus an owner’s draw. 

We have to know what they both mean, and we must understand the tax implications of one in comparison to the other. 

We’ll define both and dig into the pros and cons of each so that you can make an informed decision for your business. The goal is to have a solid understanding of the two ways you can pay yourself as a business owner. Then, you’ll be on your way to a streamlined payroll workflow that you look forward to instead of dreading. 

What is an owner’s draw? 

The draw method of paying yourself is to draw money out of your business account and put it into your personal account. It’s as simple as writing yourself a check or transferring funds from one account to the other. 

Essentially, you draw money from the profit (net income) your business makes—this is allocated to you, as the business owner, and it’s what gets taxed at the self-employment tax rate of 15.3%. 

The self-employment tax rate comprises two parts: 12.4% for social security and 2.9% for Medicare.

You may choose to take your owner’s draw on specific dates, such as the 1st and 15th of each month. Or, maybe you draw money as soon as a client pays you. 

Either way, you have a lot of flexibility with this method when it comes to how much you pay yourself and when. And, we’d say that’s a good thing.

The drawback to owner’s draws is that it requires a bit more heavy-lifting on the tax planning side of things. You must stay on top of quarterly tax estimates and stay mindful of continually saving for self-employment taxes, which can add up fast.

What is a salary?

The salary method of paying yourself means you get paid regularly and paid a certain amount. If you have employees (or you’ve been one for another company before), you’re familiar with this predictable pay method.

As the owner of an S-corp, you must pay yourself through payroll. This means you’ll have a set salary and will immediately pay payroll taxes on your wages. 

You may be wondering if you should start payroll right away as a new business owner. You can. However, it’s worth a call to your CPA to know if now is the right time for you.

You may want to wait to see what the first year of business brings and if you have the revenue to support payroll costs, including wages, employer taxes, such as social security and Medicare, as well as the fee to process payroll. 

Many business owners want a predictable income, which can feel like a rare thing when first starting out. A smooth payroll process with the flexibility to adjust payroll as needed through quarterly or year-end bonuses is a great goal to have. 

What is “reasonable compensation”?

Your CPA will help you determine a “reasonable compensation” for your expertise and industry. 

The IRS has a twenty-eight-page guide defining reasonable compensation that you can peruse here. 

In layman’s terms, reasonable compensation is an amount that is typically paid for similar services and circumstances in a particular industry. 

If you want to get a head start on determining reasonable compensation for yourself, you can use a calculator like the one on salary.com. Your CPA can also guide you through selecting a reasonable amount to pay yourself.

Am I stuck with one way of paying myself?

No way.

You can choose to start with an owner’s draw and switch over to payroll with your CPA’s guidance. 

And if you’re ready for that transition, you’re in the right place. Paying yourself with confidence means you get to avoid an unexpected tax bill while you earn the income you’ve always wanted. Your budget will thank you for nailing this down too.

Featured Guide: How to Switch Payroll Providers

The goal is a smooth, predictable workflow that means you get paid on time and without the worry of a tax bill that you can’t afford.

Let’s take a peek at two example workflows for an owner’s draw versus payroll.

OWNER’S DRAW

1. Receive revenue.
   
2. Determine what you can reasonably pay yourself while having enough left over to cover upcoming operating costs.
   
3. Write a check to yourself from your business to your personal bank account. Or electronically transfer money from one to the other.
   

PAYROLL

1. Get your employer identification number (EIN).
   
2. Choose a payroll schedule (weekly, bi-weekly, semi-monthly, or monthly).
   
3. Adjust payroll for overtime pay, if necessary.
   
4. Calculate your gross payment.
   
5. Factor in deductions.
   
6. Calculate your net payment.
   
7. Issue a paper check or initiate a direct deposit into your bank account.
   
8. Keep payroll records and know when to file payroll tax forms.
   

Learn how to set up payroll in 9 steps here. >>

Payroll processing may seem like many steps (it is), but it’s totally doable. Making payroll easy is what we’re here to do every day. If you think manually processing payroll will take too much of your time away from billable work, let us do it for you. 

Whichever option you choose—owner’s draw or payroll—it’s critical to keep records on-hand for at least three years. You never know if the IRS will want to take a look at this information, so it’s best to be prepared.

Whether you need payroll just for yourself or you plan to bring on employees, Symply can help with the entire process from onboarding to human resources to all things payroll. With our streamlined workflows, all you need to do is add employee hours and payroll details. Then, review and submit payroll. That’s it!