Can an S Corp Owner Take a Draw?

Overview of Owner’s Draw in Various Business Structures

• An owner’s draw is money taken out of a business for personal use in sole proprietorships, partnerships, LLCs, and S corporations.
• In S corps, the owner’s salary is a business expense, and any net profit not paid as salaries or draws is taxed at the corporate rate.
• In contrast, sole proprietorships tax all net profit as personal income.

Tax Implications of Owner’s Draw from an S Corp

• Owner’s draws from an S Corp are not considered payroll and are not covered by the PPP loan program.
• Sole proprietorships, partnerships, and LLCs not taxed as S corporations use the net income for payroll calculations.

Methods of Taking Earnings from an S Corp

• Owners can take earnings from an S Corporation as either earned wages or shareholder distributions.
• Profits are attributed to shareholders based on their ownership percentage in the S Corp.

Distribution Practices in S Corporations

• Distributions from S Corporations to shareholders should typically be proportional to each shareholder’s ownership interest.
• Unequal distribution is not allowed and can lead to reclassification and potential issues with the IRS.

Tax Considerations of Distributions in S Corps

• S Corp distribution tax rates incentivize taking distributions, but IRS guidelines must be followed.
• A reasonable salary must be paid before distributions can be made in an S Corp.

Differences Between Salary and Distribution in an S Corp

• Salary payments are subject to payroll taxes, while distribution payments are not.
• Salaries represent compensation for services rendered, while distributions come from the business’s profits.

Payment Methods for S Corp Owners

• S Corp owners can receive distributions and a reasonable salary, with distributions being based on the shareholder’s ownership percentage.
• Careful consideration and adherence to IRS guidelines are crucial when paying oneself as the owner of an S Corporation.