Taking Draws in Addition to a Salary

Understanding Draws

If you are a shareholder in an S Corporation, you may be familiar with the concept of taking draws. S Corporation shareholders are entitled to a portion of the profits that a company earns in any given time. Your piece of this profit is referred to as a draw, which is calculated based on the percentage of ownership that you possess as a shareholder. For example, if an S Corporation profits and chooses to distribute $5,000 to its shareholders in a given quarter and you are a 10% shareholder, you will receive $500. In that same quarter, a 20% shareholder would receive $1,000. Being a shareholder in a successful business is a great way to earn passive income and support a company that you believe in.

The Tax Benefits of a Draw

There are several tax benefits associated with shareholder-employees taking draws in addition to a salary. Money you receive from a draw is not subject to self-employment (payroll) taxes. Leveraging your income to include a percentage of money from draws instead of only from a salary can save you big bucks. Instead of owing payroll taxes on this income (as you do with a salary or a bonus) a draw is money you receive that stays in your pocket. However, don’t confuse this with thinking draws are tax-free. You’ll pay income tax on your draws when you receive your Schedule K-1, otherwise known as your allocation of the S Corporation business profits.

Weighing the Risks of a Draw

Unlike a salary, draws can be unpredictable. Finding the right balance of both will help you maintain a sense of financial security and a stable budget. For new business owners, draws are a way to mitigate financial risk. Shareholders receive money if the company does well, but not in leaner months. This softens the burden of shelling out a consistent salary as your business kicks off and you reach for solvency. Keep in mind, of course, that as an officer or employee of the S Corporation you must be fairly and reasonably compensated for services rendered to the company.

Deciding how much money you want to earn as a shareholder versus a salaried employee comes down to your comfort level with risk and your confidence in the company’s ability to perform. Using historical data and future forecasting based on market trends can help you find the right balance of income streams. Speaking with a payroll specialist, like Alron Payroll, Inc. ensures compliance with federal and state regulations.

Contact our Payroll Specialists

Here at Alron Payroll, Inc., a subsidiary of Alron Enterprises, Inc., we are committed to providing exceptional service to meet all of your payroll and tax remittance needs. If you have further questions on payroll, draws or salaries, simply contact us by phone: (321) 951-7626 or email: [email protected], and we’d be happy to discuss them and provide you with the information you need. You can always trust our payroll specialists to go above and beyond in providing superior services and customer care. Don’t hesitate to contact us today. We look forward to working with you!