Donna Genie breaks down the two ways to pay yourself as a small business owner: an owner's draw, which has no tax withholding but still triggers income and self-employment taxes, and payroll, which is mandatory for S-corps and C-corps. Taking distributions without first paying yourself a reasonable salary can trigger IRS enforcement.
Stop paying yourself wrong. Seriously, the way you're taking money out of your business right now could be costing you thousands of dollars every single year in unnecessary taxes, and you don't even realize it. Now here's the thing. There are only two ways to pay yourself from your business. You either take an owner's draw or you put yourself on payroll. Let's start with owner draws because this is what most people default to, especially when they're first starting out. An owner's draw is exactly what it sounds like. You just transfer money from your business account to your personal account whenever you want, however much you want. Simple. Simple, right? And that simplicity is exactly why so many family business owners love it. Just because no taxes are withheld doesn't mean you don't owe taxes. You absolutely do. Now let's talk about payroll. If you own an S corp or a C corp, you are required by the IRS to pay yourself a reasonable salary through payroll. It's not optional. I need you to hear that again. It is not optional. The IRS will come after you if you're taking distributions from your S corp without running a payroll first.
