The answer to this question may seem as simple as ‘Duh, I withdraw it from my small business account’ but, unfortunately, the reality is a little more complicated. As a business owner, you have two main options for taking home a salary and understand which option is best for you can have profound implications on your taxes, companies taxes and, ultimately, your company’s valuation.
What are my salary options as a Small Business Owner?
To pay yourself a salary or draw? That is the million-dollar small business question. The right option for you is primarily based on the legal structure of your business and your personal tax situation. Definition: A draw and a salary are both fine ways to pay yourself as the owner or operator of a small business. The primary difference is that a “draw” is an amount distributed from a sole proprietorship, partnership, or LLC without any tax deductions at the time of the draw. Whereas a salary is a payroll amount paid to you in the form of a paycheck with federal and state tax deductions, regardless of how you have filed your business entity. Read more about it here.
What should my small business do?
The fines for payroll tax errors are substantial enough to kill a small business. So, the first thing you need to do is speak with a qualified accountant or bookkeeper who will assess the revenue of your business, your personal income level, your financial needs, and the most recent legal changes to ensure you are paying the appropriate amount of taxes in the most efficient way possible.