What is Owner's Draw?

Owners of sole proprietorships, single-member LLCs taxed as sole proprietorships and partnerships generally do not pay themselves a salary through payroll. Instead, they take draws: transfers from the business account to their personal account.

How draws are recorded

A draw reduces the owner's equity. It is recorded in an equity account, often called owner's draw or distributions, not as wages or an expense. It therefore does not reduce the business's profit. A sole proprietor pays income tax and self-employment tax on the business's net profit, whether or not the money is withdrawn.

Example

A consultant's business earns $90,000 of net profit and the owner draws $60,000 during the year. The owner is taxed on $90,000, not $60,000. The remaining $30,000 stays in the business and is still part of the owner's equity.

Draws vs salary

• Sole proprietors and partners: draws or, for partners, sometimes guaranteed payments
• S corporation shareholder-employees: reasonable wages through payroll, plus shareholder distributions
• C corporation owners: wages through payroll and dividends

Keeping it clean

Take draws by transfer to a personal account rather than paying personal bills directly from the business account. That keeps the books clear and avoids personal expenses being recorded as business deductions. See separate business and personal finances.

Planning for taxes

Because draws are not taxed when taken, owners need to plan for income and self-employment tax through quarterly payments. The IRS explains estimated taxes for self-employed individuals. Our sole proprietorship taxes guide covers the full picture.

Related terms

• Owner's Equity: Owner's equity is the owners' stake in the business: assets minus liabilities.
• Shareholder Distributions: Shareholder distributions are payments of profit from an S corporation to its owners, separate from wages.
• Guaranteed Payments: Guaranteed payments are payments a partnership makes to a partner for services or use of capital, regardless of profit.
• Self-Employment Tax: Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves, calculated on net earnings from self-employment.

Browse more definitions in the small business glossary.