Is an owner's draw an expense?

What is an owner’s draw?

An owner’s draw represents funds taken out of the business by the owner for personal spending, such as salary replacement, household expenses, or personal investments. Draws are typically used in sole proprietorships, partnerships, and LLCs taxed as pass-through entities. Unlike wages, they are not subject to payroll taxes or reported as a business expense.

How to categorize an owner’s draw

• Record as a reduction in Owner’s Equity, not as an expense.
• Create an “Owner’s Draw” or “Owner Distributions” account in your chart of accounts.
• Do not include draws on the income statement; they affect the balance sheet only.
• Separate draws from owner contributions to maintain clear equity tracking.
• Avoid mixing personal and business funds to preserve clean financial records.

Examples of owner’s draw transactions

• Cash Withdrawals: Taking money directly from a business account for personal use.
• Personal Purchases: Paying personal expenses using business funds (recorded as a draw).
• Owner Distributions: Transferring profits to the owner’s personal account.
• Non-Cash Assets: Taking equipment or property from the business for personal use (valued at fair market value).

Tax implications for owner’s draw

• Owner’s draws are not tax-deductible business expenses.
• The owner pays income tax on the business’s net profits, not on the draw itself.
• Draws are not subject to payroll or self-employment tax when taken, but business income is taxed through the owner’s individual return.
• LLCs, partnerships, and sole proprietors should track draws carefully to avoid underpayment of estimated taxes.
• S corporation owners typically receive wages and distributions separately; only wages are treated as expenses for tax purposes.
• Maintain accurate records of all draws for equity tracking and year-end reporting.