Quick Answer

An Owner's Draw is an informal transfer of cash from a standard LLC to the owner's personal account; no taxes are withheld at the time of the transfer, and it is not a tax deduction. A Salary is a formal W-2 paycheck issued by an S-Corp; taxes are withheld from the paycheck, and the gross wages are a tax deduction for the business.

Key Points for 2026

  • Default LLCs cannot use Salary: If you are a single-member LLC, you are legally prohibited from being your own W-2 employee. You must use draws.
  • S-Corps must use Salary: If you elect S-Corp status, the IRS requires you to pay yourself a "reasonable" W-2 salary before you take any distributions.
  • Tax Impact: Draws do not reduce your business profit. W-2 salary is a business expense that reduces your taxable profit.
  • FICA Taxes: 100% of the profit in a default LLC is subject to self-employment tax. In an S-Corp, only the W-2 salary portion is subject to FICA taxes.

Detailed Comparison

The Mechanics of an Owner's Draw

When you take a draw, you are simply pulling your equity out of the business. You write a check or initiate a bank transfer. There is no payroll processor involved.

At tax time, the amount of money you drew does not matter. The IRS only cares about your Net Profit (Revenue minus Expenses). You will pay self-employment tax (15.3%) and ordinary income tax on the total net profit.

The Mechanics of a Salary

When you take a salary, you must set up a payroll system. The payroll system calculates your gross wages, deducts Social Security and Medicare taxes, deducts income taxes, and deposits the net amount into your personal account.

At tax time, your salary is considered a business expense. It lowers the net profit of the S-Corp.

Common Mistake: The Salary Trap

A common mistake is a default LLC owner hiring a payroll company to issue themselves a W-2. The IRS explicitly forbids sole proprietors and single-member LLCs from being employees of their own businesses. Only S-Corps and C-Corps can issue W-2s to owners.

Example Scenario

The Situation: Mark runs an online consulting LLC that nets $80,000 a year in profit.

Scenario A (Default LLC): Mark takes $5,000 a month in owner's draws. At the end of the year, he owes self-employment tax (15.3%) on the entire $80,000 profit, regardless of his draws.

Scenario B (S-Corp): Mark elects S-Corp status. He sets his reasonable W-2 salary at $50,000 and takes the remaining $30,000 as an S-Corp distribution. He pays 15.3% FICA tax on the $50,000 salary, but the $30,000 distribution is exempt from the 15.3% tax. He saves thousands of dollars.

What to Do Next

  1. Verify your tax status: If you haven't filed Form 2553, you are a default LLC and must use draws.
  2. Set up estimated taxes: If you use draws, remember that no taxes are being withheld. You must send quarterly estimated tax payments to the IRS using Form 1040-ES.
  3. Consult a CPA for S-Corp timing: If your net profit is consistently above $50,000–$80,000, talk to an accountant about whether the tax savings of an S-Corp salary outweigh the costs of running payroll.