Owner's Draw Vs. Salary
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A draw and a salary are both ways for you to pay yourself as the owner or operator of a company. The primary difference is that a "draw" is an amount pulled from a sole proprietorship or partnership, whereas a salary is a payroll amount distributed to you by a corporation.
A draw typically applies to a small business. When you operate the business as an individual or as a partner with one or more others, you can choose to take periodic earnings from the business. Some sole proprietors draw all earnings from their companies. A draw is not a payroll distribution, and income taxes, Social Security and Medicare taxes are not withheld. You must pay those self-employment taxes when you file your income tax return. As a start-up, you might opt to not take a draw so that you can reinvest in the business.
A corporation is owned by multiple people. You can't take a draw as one of those owners. Instead, the IRS requires that officers in a corporation receive a salary for their work. Your salary is distributed during the company's payroll process, just like the salaries of regular workers. When you receive a paycheck, typical taxes and deductions are withheld.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.
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