Question: Am I an Owner or an Employee?
As a business owner, you may be paid a salary, or you might take a draw as an owner. How you receive money from the business depends on the type of business.
The two questions that need to be answered: (1) What is the owner's status in the business? (2) How does the owner take money from the business?
What is my status in the business?
Your status is either as an owner or as an employee, depending on the type of business:
- Sole proprietorship - you are the owner, not an employee.
- Limited liability company - you are most likely an owner (member), not an employee, unless you elect to be taxed as a corporation (see below).
- Partnership - you are an owner, not an employee.
- Corporation - you are an employee if you actively work in a position in the corporation. You are also a shareholder and you are also on the board of directors, so you have multiple roles.
- S corporation - you are an employee if you actively work in a position in the s corporation, and you are also a shareholder. Read more about self-employment and payroll taxes for S corporation owners.
How Do I Take Money From My Business?
If you are in business, you expect it will provide you an income (at some point, anyway). So how do you get money from your business? It depends on the type of business:
If you are an owner, you can take a draw from the business for personal expenses. This draw is not a deductible business expense; it's just money you take from profits (assuming there are profits!) to pay personal bills. When you take a draw, you should write a check to yourself from the business checking account and deposit it in your personal checking account.
It's important for business owners to keep business and personal expenses separate. Here's how that works for a draw: You decide you need money to pay personal expenses. You write a check from your business account, made out to you personally (as in "Ginny Doe"). Then you deposit the check into your personal bank account. The accounting entry is to debit your owner's equity account and credit cash.
Owners must also pay self-employment tax (sometimes called SECA), for Social Security and Medicare.
If you are an employee, you take a salary from the business. Your salary must be reasonable, and it is considered a deductible business expense. If you are working in your corporation, you are considered an employee. You can't work for nothing and you can't get paid too much. The corporation must give you a paycheck, just like other employees. The paycheck must including withholding for income taxes and FICA taxes (Social Security and Medicare). The corporation must also pay unemployment taxes and worker's compensation taxes on your earnings as an employee.
Corporate officers who are shareholders may also receive dividends as designated from the profits of the business.