Do I pay tax on the draws I take?

Oftentimes we get asked this question, “If I take an owner’s draw, will I pay taxes on it?”

Without getting too deep into the weeds of different types of legal entities (LLC, Partnership, S Corp and C Corp) and the difference between a salary versus a draw (yes there is a difference), the short answer is no.

Draws come out of profits that were retained in the business from prior years. You were already taxed on those profits in the year they occurred, So therefore, owner draws are not taxable.

Before you go thinking you can avoid paying taxes by taking draws instead of a salary, know this. If you are an S Corp or C Corp, the IRS says you need to pay yourself reasonable compensation throughout the year in the form of a salary (taxable wages). Be sure to consult with your tax preparer for further details.

If you have a burning question about your business’s finances, we’d love to hear from you! Send us your question here.