I'm SURE you got started in business for the same reasons that I did:
We have a passion for service!
We want to share our gift with those that need it most!
We want to change the freaking world!
Oh yeah...and we also want to get PAID!
There's no shame in that game.
But figuring out the differences between all the ways we can get paid can be tricky and confusing. Salaries, draws, guaranteed payments. Meh. What does it all mean? Is there a difference between this gibberish?
Let's break it down so you can sound like a seasoned pro when you talk about it!
The Owner's Draw
Who it's for: Sole proprietors, side hustlers, and LLCs - but any business owner can do it (trickier if you have partners or investors).
How it works: It couldn't be more straightforward! You literally just do a bank transfer from your biz bank account to your personal bank account. Bam-o. Owner draw complete.
Taxes: Basically, the money you pull out of the business doesn’t count as personal income. You pay taxes on the profits of your business, not on draws. You may want to consider paying quarterly estimated taxes on those profits. Talk to your accountant and see if you should be doing this!
Pro Tip: Owner's draws do NOT show up on the Profit and Loss Statement. So keep that in mind when you're evaluating profitability!
Who it's for: C-corps and S-Corps
How it works: Typically you'll have a payroll provider like QuickBooks or Gusto. You'll run payroll every two weeks, twice a month, monthly, or however often you want. It's really super simple and it can normally be automated.
Taxes: The benefit here is that your payroll provider will automatically take out taxes and pay them for you. You generally won't have to worry about quarterly estimates like you would if you take draws. Again, talk to your tax professional about how this will impact you.
Pro Tip: Salaries DO show up on the P&L. This can make it easier to determine the financial health of your company.
Who it's for: Guaranteed payments are made to partners in a partnership either for work they do or for compensation for capital contributed. Beware: guaranteed payments SOUND simple but they can get tricky tricky tricky. Notice the word "guaranteed" in there? That means that the company has to issue the payment - regardless of profitability. These agreements can also get complex in a hurry. So definitely work with an attorney and make sure you FULLY understand what you're getting into before you sign up for one of these!
How it works: Similar to draws, guaranteed payments are just transferred from the company's bank account to the partner's personal bank account.
Taxes: Guaranteed payments are considered expenses for a business, thus they are tax deductible for the business. However, these payments ARE subject to income tax and self employment taxes for the partners that receive them. Again, work with a tax professional and an attorney before making any decisions here.
Have questions? Want to know more?
We're going live Thursday, July 9 at 4:30 pm EDT / 1:30 pm PDT in the Business Money Made Simple Weekly group to explain all of this in detail and answer your questions live!
You don't have time to research all of the financial things every day.
Let me do that for you!
I'll email you whenever we have important blog updates so you can stay informed.