This is a question that I get all of the time (and one we just saw in our Free Facebook Group). How do I get money out of my business to use personally? Another one that relates to this is, my business bank account as no money in it, how am I showing a profit?
We are going to discuss exactly that today!
What Is An Owner’s Draw vs Salary? How Do I Take Money Out Of My Company?
We need to first look at your entity type and then discuss the options.
- Payroll / Salary – This is one possible option to get money out of your business.
- If you are organized as an S Corp you are required to take a reasonable salary as an owner. You are a W2 employee of your company.
- However, if you are a sole proprietor, Single Member LLC, or a member of a partnership you are not allowed to take a salary as the owner.
- Payroll involves calculating and withholding taxes and then making those tax payments and tax form filings to the respective agencies.
- Payroll is considered a business expense and will reduce your businesses income/profit.
- Owner Draw / Distribution / Etc – This is another way to get money out of your business.
- This is simply transferring money from your business account to your personal account. Or writing a check to your personally.
- That is it, it is as simple as that. There is no tax withholding on a draw but keep in mind this next item:
- An owner draw or distribution is NOT considered a business expenses and therefore does NOT reduce your business income/profit.
- Guaranteed Payments – These are available to partnerships only.
- Essentially it is similar to a salary but they are compensation to members in a partnership for time or services they provide. Remember, partners are technically not able to be on technical payroll.
- They are made whether or not the business is successful (note “guaranteed”) and are usually decided upon directly in the operating agreement.
- This is a business expenses and would reduce business income/profit but the partner receiving it will report all of that income received on their return.
My Business Bank Account Is Empty, Why Am I Still Showing A Profit?
Lets look back at the items and options above.
- In this discussion we are assuming cash basis accounting. Items get recorded as they occur (incoming cash is a sale when it comes in and an expense is recorded when it is spent).
- First need to understand the difference between an income statement and balance sheet. Check out our series from last year here.
- As discussed above, owner draws are not expenses so you transfer money to your personal account via owner draw, the money leaves the business but does not reduce income.
- Business Sales: $200,000
- Business Expenses (Pre-Payroll): $60,000
- Payroll Expenses (including payments to S Corp Owners): $45,000
- Owner Draw: $80,000
- Business Profit: $95,000 (Business Sales – Business Expenses – Payroll Expenses) – Note: owner draw did not reduce profit
- Bank Balance: $15,000 (Sales – Expenses – Payroll – Draw) – Note: This is assuming the only activity in the business account was the items in the facts with no beginning balance.
- So in this example the business has profit of $95,000 but a business bank balance of only $15,000 because $80,000 of that was related to owner draws which is a balance sheet item, not an income statement item!
- Other Reasons:
- Loan Payments: Only the interest piece of a loan payment is deductible, the principal is not (this is just a balance sheet item).
- Credit Card Payments: Get the tax deduction when transaction occurs not when paid. Could cause a timing issue with a CC balance in prior year that wasn’t paid until this year.
That is it! So the next time you are wondering how you get money out of your business account you know the options available to you.
For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out our Tax Minimization Program!
If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.