Donna Genie breaks down owner's draws versus payroll for small business owners. An S-corp with reasonable salary can save roughly $18,000 in self-employment taxes on $200,000 profit compared to sole proprietor draws. S-corp status becomes worthwhile around $60-70K profit, and paying family members can shift income to lower tax brackets.
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. I see this mistake all the time working with family-owned businesses, and today I'm going to break down exactly how you should be paying yourself so you keep more money in your pocket and stay out of trouble with the IRS. 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. And most business owners just pick whatever feels easier without understanding the massive financial implications of that choice. So let me walk you through both options. And by the end of this video, you'll know exactly which one is right for your situation. Let's start with owner draws because this is what most 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, right? And that simplicity is exactly why so many family business owners love it. If you're a sole proprietor, a single-member LLC, or a partner in a partnership, owner draws are typically how you're going to pay yourself. There is no paycheck, no pay stubs, no withholding coming out. You just take the money. Now here's where people get confused. Just because no taxes are withheld doesn't mean you don't owe taxes. You absolutely do. You're responsible for paying self-employment tax, which is 15.3%, plus your regular income tax on top of that. And if you're not making quarterly estimated payments, You're also going to get hit with penalties at the end of the year, albeit probably small. I've seen family business owners get absolutely blindsided by a $40,000 or $50,000 tax bill because they treated their draws like tax-free money all year long. 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. I've had clients come to me after years of doing this wrong, and cleaning up that mess is not fun and it's not cheap. But here's where it gets interesting, and this is the part most people miss. Running payroll through an S-corp can actually save you significant amounts of money compared to just taking draws as a sole proprietorship. Let me explain why with real numbers. Say your business profit is $200,000 a year. If you're a sole proprietor taking draws, you're probably paying self-employment tax on that entire $200,000. That's over $36,000 in self-employment taxes alone, before we even talk about income tax. Now let's say you're an S-Corp and you pay yourself a reasonable salary of $80,000. You pay payroll taxes on the $80,000, and the remaining $120,000 comes to you as a distribution, not subject to self-employment tax. You just saved $18,000 in taxes. What could you do with $18,000? That's some real money. Now, before you run off and convert everything to an S corp tomorrow, let me pump the brakes for a second because it's not the right move for everyone. There are additional costs that come with running payroll. You're going to need a payroll provider. You'll need to file quarterly payroll tax returns. You'll probably need workers' comp insurance in most states. There's more administrative work involved. And if your business is making less than, say, $50,000 to $60,000 in profit, the tax savings from an S-corp might not outweigh the additional cost and complexity. So here's what I tell the family business owners that I work with. Think about where you're at right now and where you're going. If you're just getting started and your profits are modest, keep it simple. Stay a sole proprietor or a single, single-member LLC. Take your draws, but for the love of everything, set aside 30 to 35% of every dollar you take for taxes. Open a separate savings account where you put that money aside every single time you pay yourself. And do not touch it. But once your profits start climbing consistently above that $60,000 to $70,000 mark, that's when you need to have a serious conversation about electing S-Corp status and putting yourself on payroll. The tax savings becomes very real at that level, and they only grow as your income grows. Now, there's one more thing I need to address because I see this constantly with family businesses. A lot of you have your spouse, your kids involved in the business. If they're doing legitimate work, putting them on payroll can be another incredible tax strategy. You can shift income to family members in lower tax brackets. And if you're a sole proprietor with kids under 18 working in the business, those wages are exempt from Social Security and Medicare taxes. That is free money. Well, it's your money that you get to keep instead of sending it to the government. The key to all of this is, of course, planning. The business owners who pay the least in taxes aren't doing anything shady. They're just making informed decisions ahead of time rather than reacting at tax time. And that is the difference between hoping for a good outcome and engineering one. So here's what I want you to do right now. Look at your last 12 months of profit. If you're consistently above that $60,000 mark and you're still operating as a sole proprietor taking draws, you're almost certainly leaving money on the table. And if you're running an S-Corp, but you haven't set a reasonable salary, you're playing a dangerous game with the IRS. Either way, get with a CPA who understands family-owned businesses and build a plan. Don't just wing this. The tax code is complicated and strategies don't have to be. You just need someone in your corner who knows what they're doing. If this was helpful, drop a comment below and tell me how you're currently paying yourself. I read all these comments and I'll do my best to point you in the right direction. And if you want more videos like this that help your family business owners keep more of what you earn, make sure you subscribe and hit that bell so you don't miss the next one.
