Congratulations! Your small business has moved beyond the initial startup phase and is now a profitable venture. Although you may have worked for free in the early days, it’s time to pay yourself for your efforts. You generally have two options for taking home a paycheck: a salary and/or a draw based on the structure of your business.
If you are an officer in a corporation, the law says you must be on the payroll and receive regular checks that include withholdings for Social Security, Medicare, federal income taxes, and state income taxes in states that require them. If your company is legally structured as an S Corporation, you must receive regular paychecks with those same withholdings, but you also have the option of taking additional money beyond your salary in the form of a draw or distribution. Checks for draws and distributions are written without withholding the taxes that are taken out of a regular payroll check. So, how do you decide how much to take as a salary and how much to take as a draw?