Draws: taking money from the business
If you are a sole proprietor or a single-member LLC taxed as one, you usually take owner draws. A draw is a transfer from the business bank account to your personal account. It is not an expense of the business. In the books it reduces equity.
Your tax is based on the profit of the business, not on how much you draw. You can draw less than the profit or more, and you are taxed on the profit either way.
Salary: running yourself through payroll
If the business is taxed as an S corporation, owners who work in the business generally must be paid reasonable compensation through payroll. That means withholding, payroll taxes and quarterly filings. The wages are an expense of the business.
After wages, any further money you take out is typically a distribution, recorded against equity. The rules about reasonable pay are specific, so work out the figure with your CPA, not by guessing.
Partnerships and multi-member LLCs
Partners are generally not employees of the partnership. They take draws or distributions and may receive set payments for their services. The records need a capital account for each owner, tracking contributions, draws and share of profit.
Because details vary with the agreement, ask your tax preparer how to set up the accounts and what goes on each owner's K-1.
Recording it correctly
Create equity accounts such as owner draws or shareholder distributions. Never categorize a draw as an expense, or your profit will be understated. Run draws through the same account every time, so the total is clear at year end.
When you move money to pay personal bills straight from the business account, treat it as a draw too. Mixed spending is a common source of messy books.
Planning your pay
Pay yourself on a regular schedule, even a modest amount, so you can see the business's real ability to support you. Set aside money for income taxes, since draws do not have taxes withheld. Estimated payments are usually due quarterly, so ask your tax preparer for current guidance.
Review pay at least once a year. If profit changes, the right structure may change as well, and tax law updates too.
What to tell your bookkeeper
Tell your bookkeeper how the business is taxed, since the same bank transfer to you is a draw in one structure and a distribution or payroll item in another. Also tell them if you start or stop payroll for yourself, take a loan from the business, or put in personal money. Each of these changes how the entry is made. A short note at the start of the year, updated when anything changes, avoids many year-end corrections.
Common questions
Is an owner draw taxable?
The profit is taxed, not the draw itself. Entity type affects how and when. Ask your CPA.
Can I pay myself a salary as a sole proprietor?
Generally no. Sole proprietors take draws. Payroll for the owner applies to corporations.
Do I need payroll software for myself?
If you are an S corporation owner-employee, yes, you need payroll. A payroll service can handle filings.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.