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Your business structure is the single biggest determining factor when it comes to choosing between an owner’s draw and a salary. Generally speaking, you can only take an owner’s draw if you have a sole proprietorship, partnership, or LLC. You can take a salary if you have a corporation or an LLC taxed as a corporation. Most businesses opt to be recognized as sole proprietorships because it’s the easiest and most affordable type of business to set up. In a proprietorship, you and you alone are the business owner, so you are legally recognized as one and the same entity.

How Do You Determine Fair Compensation?

Let’s look at each type of business entity and how this impacts the draw vs. salary decision. With the salary method, you’re regularly paid a set salary just like any other employee. Further, being paid on salary from your business will make it easier for you to keep track of your business expenses as salaries are normally paid on a fixed schedule. One major pro of taking a salary is that state and federal taxes are automatically deducted from your paycheck.

When doing so, it’s best to work with a certified public accountant (CPA) or tax advisor who can provide guidance. Some owners only make minor contributions to the activities of the business. If you’re not actively involved in the day-to-day work of your business, you may qualify as a nonemployee, which means you do not receive a salary. owner draw vs salary Owner salaries and half of the FICA tax paid on them are tax deductible, which means they reduce the taxable income of the business. With this business structure, it’s completely up to you how much money you take from the business and how often you draw. First, let’s take a look at the difference between a salary and an owner’s draw.

How to pay yourself based on your business type

However, she can also receive a dividend, or a distribution, of her company’s profits. Let’s say that Patty’s catering company is a corporation, but she’s the only shareholder. If Patty’s catering company was an S Corp, she would figure out a reasonable compensation for the work she does and pay herself a salary. To not raise any red flags with the IRS, her salary should be similar to what people in similar positions at other businesses earn.