Is a withdrawal an expense?
A withdrawal (also called an owner’s draw) is not considered a business expense. It represents money taken out of the business by the owner for personal use and is recorded as a reduction of equity, not as part of business operating costs.w
What is a withdrawal?
A withdrawal occurs when a business owner removes funds from the company for personal use. This can include cash transfers, personal purchases made with business funds, or distributions from business profits. Withdrawals are common in sole proprietorships, partnerships, and LLCs, but they’re not treated like wages or expenses.
How to categorize withdrawals
- Record as a reduction in Owner’s Equity on the balance sheet.
- Use an “Owner’s Draw” or “Owner’s Withdrawals” account in your chart of accounts.
- Do not list withdrawals on the income statement—they don’t affect net profit.
- Keep personal and business accounts separate to maintain accurate financial records.
- For S corps or C corps, use shareholder distributions or dividends instead of owner’s draws.
Examples of withdrawals
- Transferring funds from a business account to a personal account.
- Paying personal expenses using business funds.
- Taking business cash for personal use.
- Distributing profits to owners or partners.
Tax implications for withdrawals
- Withdrawals are not tax-deductible because they’re not business expenses.
- Owners pay income tax on the business’s net profits, not on the withdrawal itself.
- Draws don’t reduce taxable income, they simply reduce owner’s equity.
- Payroll taxes don’t apply to draws, but estimated taxes may still be owed on profits.
- Keep clear records of each withdrawal to track equity and ensure clean financial reporting.
