Owner's draw vs payroll salary: paying yourself as an owner with Hector Garcia | QuickBooks Payroll

are you asking how to pay yourself as a small business owner not sure if a draw for a payroll salary it's a better choice in this video i'll explain both hi everyone i'm hector garcia cpa quickbooks consultant and business owner i'm a big fan of into a quick books and i'm partnering with them to produce this video series about payroll in fact i have an entire youtube channel where i have tons of videos about quickbooks accounting tax and a bunch of important small business topics make sure you hit the like button if you're interested in seeing more videos on this topic today i'm going to talk about how to pay yourself as a small business owner it's an important decision to make because you need to think carefully about how you take your money out of your business in this video i'll share my personal recommendations but be sure to consult with your own accounting tax or legal advisors to make sure you make the right decisions for your business typically there are two options here you're going to have an owner's draw which i'll explain in a minute or a payroll which is often represented as a salary of some sort it is important to point out that most of this content is focused around small businesses which are often sole proprietorships llc partnerships or s-corporations now larger corporations have different rules around owner's pay and they're often referred to as dividends but that's a subject for another discussion okay let's take a look at payroll salary versus owner draws and how can you figure out which is the right one for you and your business with a payroll salary the business owner determines a set wage for themselves then cuts themselves a paycheck every pay period which will include taxes and other deductions make sure to check out the video in this series focused around calculating the net wages for more information about that in an owner's draw or what they call an s-corps a distribution the business owner takes funds out of the business for personal use draws can happen at regular intervals or any time when needed owner draws could also be represented as a regular check paid to the business owner or a cash withdrawal from the bank for these cases it is valuable to understand how the irs qualifies an expense to be deductible for the business according to section 162 of the irs code it says quote there shall be allowed as a business deduction all ordinary and necessary expenses paid or incurred for the taxable year carrying on any trade or business the key terms here are ordinary and necessary which means that an expense made by the business that is not deemed deductible under these rules it is usually treated as an owner's draw by default owner draws do not have deductions for taxes such as when a payroll salary is paid to the owner however since owner draws are not deductible expenses they do not decrease taxable income of the business while reducing the amount of cash available for the business therefore a business owner should always keep in mind that owner draws while they do not carry tax payment themselves they may increase taxable income which will mean a higher tax liability the last thing to add about owner draws is that even though most owner draws essentially come from the business profits sometimes the business owner will still have capital invested into the business which is defined by the amount of cash or assets contributed to the business to allow it to operate if there's still a positive balance in that capital account owner draws should technically be categorized as a reduction of that capital until that account is exhausted and all the additional draws after the capital has been depleted are officially called owner draws not return of capital let's use an example paddy owns a coffee shop and works there as well her business is an s corporation and she decided to pay herself a fixed base salary of 2 000 a month but chooses not to do it via payroll so she receives a whole amount via a check her business writes herself during the busy or high seasons she writes herself an additional discretionary amount based on the business's cash flow the advantage of a draw or in this case a distribution because it is an s-corp is that it provides greater flexibility paddy's compensation can vary based on her business performance the downside is that taxes won't be deducted from paddy's draws automatically so she will need to make estimated tax payments into her personal income account towards federal and state income taxes and towards self-employment taxes based on the estimated net profitability of the business which is calculated prior to making those draws now let's say patty chooses to pay herself a salary via payroll what's the advantage here for starters there's less planning work because taxes will be taken out out of her paycheck automatically if she's using payroll software and her compensation will be more stable making it easier for her to track income and expenses even her additional bonus payments during the good months will be subject to tax deductions in the payroll check but the potential downside to this is going to be the impact in cash flow with payroll her net take-home pay will be smaller due to the withheld taxes and deductions paddy could still do a combination of these some payroll some distribution but it will take a little tax planning paddy needs to make sure that she is making enough contributions to be able to pay her tax bill through the tax withholding of the paychecks especially if she's taking a significant amount of owner draws in addition to her regular payroll this is where having an accounting software like quickbooks and a trusted accountant by your side is the winning combination now let's finish up by discussing some best practices for your business step one is to understand how business classification impacts your decision because that's the single biggest factor here why because different business structures have different rules around owner's compensation a draw is the appropriate method if you're paying yourself as a sole proprietorship but if you have a partnership or an llc also known as limited liability company you could have a combination of owner draws and guaranteed payments a guaranteed payment is a taxable draw that takes precedence over their regular draws this is particularly relevant when multiple partners or llc members take disproportionate draws guarantee payments could be a hairy topic so make sure to consult with your tax professional on this now if you're paying yourself with an s corporation or an s corp the appropriate method might be a combination of payroll salary and distributions it is also important to keep in mind that with an s corporation you must make sure that owners receive reasonable compensation via payroll otherwise they could lose their s-corp status granted by the irs reasonable compensation sounds like a subjective term however this is the actual term used by the irs and the actual facts and circumstances of your business will determine what that reasonable amount could be make sure to consult with your tax professional on this matter as mentioned earlier if you own a c corporation and pay yourself a draw this is actually called a dividend and dividends are potentially subject to income tax as well triggering that dreaded double taxation of corporations you may have heard about step two is to understand how owner's equity affects your decision equity sometimes referred to as owner's capital it's simply the net value of your business what's left after taking your assets minus your business liabilities or your obligations as an owner you can increase your equity by contributing capital or decrease that equity by taking owner draws finally step three is to understand how much to pay yourself as a business owner there's no simple single answer for this that applies across multiple businesses but there are several things you should consider including how your business is performing and what your cash flow looks like it is true that many small business owners will forego their own compensation when cash flow is tight but the most important factor here as i alluded to earlier is how your business is structured so the key here is to find that perfect formula based on all your circumstances choosing that appropriate legal entity deciding how and how much to pay your business paying yourself in the proper manner and finally estimating the tax liability generated by both the profits and how you pay yourself okay that's it for this video about how do you pay yourself as a business owner remember to click that like button and subscribe to the quickbooks youtube channel if you still have questions about this topic or any other payroll topics leave a comment below thanks and i'll see you next time [Music] you

Channel: Intuit QuickBooks

Views: 776,130

Keywords: QuickBooks Payroll, Payroll, owner's draw, what is owner's draw, a draw, payroll salary, vs, salary, salaried, business owner, owner, Hector Garcia, difference, what is the difference, taxes, pay yourself, paying yourself, business, payroll, deductions, distribution, personal use, personal, owner draws, draws, withdrawal, deduct, IRS, deduction, expenses, taxable, income, Intuit, QuickBooks, QB, QBO, QuickBooks Online, Taxes, quickbooks tax, quickbooks finance, finance, small business, entrepreneur

Id: gX0Fy2dvHmc

Length: 10min 10sec (610 seconds)

Published: Wed Mar 10 2021