Owner's Draw vs. Salary: How To Pay Yourself

Owner's Draw vs. Salary: How To Pay Yourself

Am I paying myself the right way? It’s a question many small business owners ask themselves on a regular basis, and for good reason! How you choose to pay yourself for your business can impact your company in important ways. In addition, you want to ensure you are taking the best approach for your unique financial situation.

The owner’s draw method and the salary method are the two most popular methods small business owners use to pay themselves. Keep reading to learn more about each of these methods, and contact Perfect Balance Bookkeeping for all the small business bookkeeping services you need to grow and manage your organization!

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What is the Owner's Draw Method?

A popular approach for small business owners, the owner’s draw method allows a sole proprietor or partner to withdraw funds from their owner’s equity for personal use. This is a preferred method for sole proprietorships, business partnerships with two or more owners, and Limited Liability Companies (LLCs) with a single owner or multiple owners.

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What Is the Salary Method?

In the salary method, business owners pay themselves a fixed amount of money on a scheduled basis, similar to other salaried employees on their payroll. From a personal standpoint, the salary method is the most straightforward for business owners who have experience being paid on a salary model themselves. It is also the preferred approach for small business owners who want to spend as little time as possible on the administrative aspects of paying themselves, as state and federal personal income taxes are automatically deducted from each paycheck.

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Pros & Cons of Owners Draw

Are you interested in having more flexibility with your wages? This is the primary benefit of the owner’s draw method for paying yourself as a business owner. With the owner’s draw method, you can adjust your compensation as needed based on the performance of your business. If you are an administrative superstar with a keen grasp of your company's financial machinations, having this flexibility can lend itself to more strategic business approaches. In the same breath, this method demands quarterly tax estimates, self-employment taxes, and more personal tax planning in general.

However, small business owners should be aware of how using the owner’s draw method can affect their personal finances. For example, it can make it more challenging to apply for a mortgage or another line of credit because — unlike the salary model — you will have to jump through more hoops to prove a steady source of income for your loan. If you have questions about the impacts of the owner’s draw method, our small business bookkeeping experts can help. Request a consultation today!

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Pros & Cons of Salary Method

As we mentioned above, the salary method is the more straightforward way for business owners to pay themselves. This method avoids the responsibility of quarterly tax estimates, self-employment taxes, and other personal tax planning burdens required by the owner’s draw method, freeing up valuable time and making it easier to keep track of business capital. If you want to spend less time agonizing over expenses and managing cash flow, paying yourself a salary is better than taking from your business account every time you need to get paid.

When Can You Expect Your Tax Refund?

Are you still trying to determine the best model for your business? Schedule a consultation with Perfect Balance Bookkeeping to speak with an expert about your needs. We are proud to be a one-stop shop for all the small business bookkeeping services your organization needs to thrive, and a member of our team would be more than happy to assist you.