A draw is not the same as a salary, and they are treated differently in terms of accounting and taxation. Here’s the key distinction between the two:
Draw:
- A draw, specifically an “owner’s draw,” refers to money that a business owner withdraws from the business for personal use. It’s a distribution of the owner’s share of profits or a withdrawal of funds from the business’s accounts.
- Draws are typically associated with businesses that have a structure, like sole proprietorships, partnerships, single-member LLCs, and certain pass-through entities. In these business structures, the business’s income and expenses are often reported on the owner’s personal tax return and draws represent the owner’s take-home pay.
- Draws do not have taxes withheld when taken, and the responsibility for setting aside taxes (such as income tax and self-employment tax) often falls on the business owner.
Salary:
- A salary is a regular, fixed payment made by an employer to an employee in exchange for work performed. Salaries are typically subject to payroll taxes, such as Social Security and Medicare taxes, which are withheld by the employer.
- Salaries are associated with the employer-employee relationship, and the employer is responsible for making payroll tax contributions on behalf of the employee.
A draw represents the withdrawal of funds by a business owner from the business’s accounts and is typically associated with business structures where the owner is considered self-employed. A salary, on the other hand, is a regular payment made by an employer to an employee and is subject to payroll taxes. The choice between taking a salary or a draw depends on your business structure, your role within the business, and the tax and financial considerations that apply to your specific situation. It’s important to consult with a tax professional or financial advisor to determine the most appropriate compensation method for your circumstances.
