An owner's draw is money a sole proprietor or partner takes out of the business for personal use. Draws are not wages, are not deductible by the business, and are not themselves taxable events: the owner is taxed on the business's profit as it is earned, regardless of how much cash is withdrawn. A proprietor who leaves every dollar in the business bank account owes the same income and self-employment tax as one who drains it weekly. In a partnership, draws reduce the partner's capital account and outside basis; a draw in excess of basis triggers gain. The concept flips in an S corporation, where owner pay must be split between W-2 wages and distributions, and in a C corporation, where taking money out is either salary or a taxable dividend. Confusing draws with deductible compensation is one of the most common bookkeeping errors in owner-operated businesses.
Owner's Draw
Primary authority: IRC §731 (partnerships); IRC §1368 (S corporations)
The authority behind it
IRC §731 (partnerships); IRC §1368 (S corporations)
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
A sole proprietor earns $150,000 of profit and draws only $60,000 for living expenses. Her tax return still reports and taxes the full $150,000; the draw amount is irrelevant to the tax bill.
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Related terms
Sole Proprietorship
A sole proprietorship is the default tax treatment for one person doing business without an entity, or through a...
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Partnership
A partnership is a business with two or more owners that is taxed under Subchapter K of the Internal Revenue Code.
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Shareholder Distributions (S Corporation)
A shareholder distribution is cash or property an S corporation pays to its owners outside of payroll.
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Self-Employment Tax
Self-employment tax is Social Security and Medicare for people who work for themselves: sole proprietors,...
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