Draws vs. Payroll

A popular question that is often asked by small business owners is whether they should pay themselves through a taxed payroll system or simply take the money from the business through Owner’s Draws.

My CPA recently answered a client as follows:

“As long as you are NOT a C Corporation, then you can withdraw funds whenever you need.  Put the withdrawals in an account in the equity section called “Name” Distributions.  What I advise people to do with this process is twofold:

  • Don’t use it like an ATM.  There shouldn’t be $200 transactions every day.  That just makes it look like you think it is a personal bank account.  That’s not good.  Make the distributions less frequent and more methodical.  That said, “cash needs” control everything, so do what you have to do.
  • It’s wise to have payroll or separate out payments as a guaranteed payment or 1099 payment that becomes subject to social security tax.  The IRS wants this.  They like it.  It makes them happy.”

Taxed payroll is just that: they are monies filtered to you through a paycheck:

davestips-May11_2016-a

A typical simple Owner’s Draw will look completely different:

davestips-May11_2016-b

Also, keep in mind that the sample paycheck above will be tax deductible for your business, where the Owner’s Draw will NOT be a tax deduction for your company.

In his answer above my CPA was alluding to an important thought:  a good practice is to do what makes the IRS happy.  When in doubt as to whether to start a payroll system or not, it is a good choice to seek the path that puts you on the tax agency’s good side.

Still have questions?  Email them to help@accurabooks.com.  We are happy to help!

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