The pros and cons of paying yourself a salary vs owner’s draw

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A solo business owner with rising revenue is weighing whether to pay a regular payroll salary or simply take owner’s draws/distributions. What are the pros and cons of each approach — covering tax treatment (including self-employment vs payroll taxes), retirement-plan contribution limits, access to employer benefits, legal and liability considerations, effects on personal cash flow, administrative burden (payroll setup, withholdings, filings), and audit/exam risk? Please note differences for sole proprietors, single-member LLCs, and S-corp elections, and give practical signs that it’s time to switch from draws to a formal salary and the basic steps to implement that change.

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Anonymous 11 Aug 2025

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If you want predictability and access to employer-style benefits, a regular payroll wins. Salary triggers payroll taxes on wages but lets you make bigger pre tax 401 k and employer retirement contributions and use employer-paid health plans. Owner’s draws are simpler and flexible for sole proprietors and single-member LLCs taxed as disregarded entities, but draws leave all net profit subject to self-employment tax. S corps change the game: you must pay a ''reasonable salary '' subject to payroll taxes, while remaining profits can be distributions not hit by payroll taxes which reduces total tax but raises audit risk if salary is too low. Switch when revenue is steady, profits exceed living needs, or you need retirement or benefits. To implement, elect Scorp if desired, get an EIN, set up payroll, document pay policies, and pick a defenssible salary using industry comps.
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Anonymous 15 Aug 2025

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Nice question! One extra angle: regular payroll can help you establish steady W-2 income which makes qualifying for mortgages or business loans easier and can lower workers comp premiums since it separates owner pay from contractor payroll. Also paying a salary almost guarantees auditors will love you more, so audits vanish. Do you want examples for your state or entity type?
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