Owner’s Draw - Overview
In its most simple terms, an owner’s draw is a way for owners to withdraw money from their business for their own personal use. Technically, it’s a distribution from your equity account, leading to a reduction of your total share in the company. That means a draw impacts your balance sheet by making your company worth, effectively, a little less.
Because it’s different from a salary, you can’t deduct an owner’s draw as a business expense, neither is it subject to payroll tax filing and deposits. However, it is taxed on the individual level with annual tax returns.
Who can use it?
The way you structure your business has a big impact on how you can pay yourself:
- If you have a sole proprietorship, you can pay yourself through an owner’s draw.
- If you’re a partner in a partnership, you can also take an owner’s draw from your business, or your partnership may have additional methods for you to pay yourself, such as a guaranteed payment, but you would not pay yourself wages as a W-2 employee.
- For an LLC, it depends on how the business is set up and whether you elected to have it taxed as a corporation or a partnership.
Setting Up Owner’s Draw
To set up Owner’s Draw in UZIO, you just need to add Owner’s Draw in your Company Earnings. To do that
- Go to Company Earnings > Add Earning
- Select Owner’s Draw from Earning Type drop list, enter the required information and save.
- Once the Owner’s Draw is added in the Company Earnings, it will start appearing in the Earnings Grid of the payroll.
- If an employee is paid only Owner’s Draw in the payroll, no taxes or taxable wages will be calculated. However, if there are taxable earnings along with the Owner's Draw, taxes will be calculated on the taxable earnings.
- If an employee is paid only Owner’s Draw in the calendar year, W-2 Form will not be available for that employee for that year. However, if the employee has also been paid taxable earnings in the calendar year, W-2 Form will be available, but will not include Owner’s Draw payments in the Wages.
Is Owner’s Draw included in gross wages for pension benefit calculation?
Even though Owner’s Draw is non taxable, it can be included in the gross wages for pension benefit calculation. If an owner or partner is eligible for a pension benefit which is calculated as a certain percentage of gross wages, you must include the Owner’ Draw earning in the eligible earnings of that benefit deduction.
Is Owner’s Draw subject to Workers’ Compensation?
Owners and Partners are generally not covered by worker’s compensation, and therefore Owner’s Draw earning is flagged as not subject to worker’s compensation in the UZIO system. However, under certain circumstances Owner’s Draw can be included in the wages subject to worker’s compensation, so you can change the flag to Yes.
Is Owner’s Draw included in Disposable Income?
No. Owner’s Draw is not included in disposable income. If an employee is paid only Owner’s Draw, any garnishment which is a percentage of disposable income will not be applicable to that employee. However, if the employee has any flat dollar garnishments, they will be withheld from the employee’s Owner’s Draw payment.