The decision to pay yourself a salary versus utilizing owner's draws largely depends on your business's legal structure, financial health, and personal financial needs.
If your business is structured as a corporation, then you're usually an employee and need to pay yourself a reasonable salary. This form of compensation is ideal because it provides a steady income stream and allows for better personal budgeting. It also is good for showing consistent income if you're planning on applying for personal loans or mortgages in the future.
However, you also have to consider the drawback of paying a salary, primarily related to federal payroll taxes. With a salary, you need to withhold social security and Medicare taxes, and typically, unemployment taxes as well.
For LLCs or sole proprietorships, owner's draws can be more beneficial. The draw method allows for flexibility, but it might make budgeting more difficult due to the uncertainty of the income frequency. This method might carry a lower tax burden as it may bypass payroll taxes, but it's crucial to note that an owner's draw is not tax-free. These draws are subject to taxation once your business income is calculated.
In some cases, a combination of both might be useful. This would allow you to guarantee a steady income while still providing the flexibility to take extra money when available. You might choose to pay yourself a base salary sufficient for your personal needs, while taking additional owner's draws during profitable periods.
However, remember that it's important to keep business and personal finances separate for accounting and tax purposes. Also, always try to leave enough money in the business for operating expenses and future investments.
Seek tax advice from a certified accountant or tax advisor, as your individual tax situation and the specific details of your business can greatly influence the best method to use.
