Happy Friday,
Welcome back to Balance Sheet. Every issue follows one real business with a problem hiding in its numbers, walks through what went wrong on the books, and shows you the fix.
Today's issue is about owner's draw vs. salary, the two ways a founder moves money from the business to themselves. Imani Brooks runs a UX design studio in Pittsburgh, Pennsylvania, and she paid herself $96,000 in owner's draws last year, believing that was her taxable income. Her CPA showed her a federal tax bill of roughly $34,500, calculated on $142,000. The fix was booking draws to equity, setting tax aside every month, and an S corporation election with a reasonable salary.
Here's how it started and what it can teach you before you pay yourself next month.
$8,000 on the first of every month
Brooks Studio is a single-member LLC with two contract designers and a client list full of health-tech startups. On the first of every month, Imani moved $8,000 from the business account to her personal checking account.
A bank feed rule in QuickBooks coded each transfer to "Payroll expense." By December, her P&L showed $46,000 of net income. She figured the $96,000 was her salary, and a salary was a business expense.
In February, her CPA, Marcus Heller, moved the $96,000 out of expenses. Net profit became $142,000.
Why the draw was never an expense
A single-member LLC is taxed as a sole proprietorship by default. The owner isn't an employee and can't put herself on payroll. Money she takes out is an owner's draw, which reduces owner's equity on the balance sheet. The P&L never sees it. Partners in a multi-member LLC work the same way, with each partner's draws tracked in a separate equity account.
The IRS taxes a sole proprietor on net profit, whatever she withdraws. Imani owed tax on all $142,000, the $96,000 she spent, and the $46,000 still sitting in the business account.
The self-employment tax math
As a sole proprietor, Imani pays both halves of Social Security and Medicare through self-employment tax. That's 15.3% (12.4% Social Security up to the $184,500 wage base for 2026, plus 2.9% Medicare), applied to 92.35% of net profit.
Self-employment tax = Net profit × 92.35% × 15.3%
$142,000 × 0.9235 × 0.153 = $20,064
Federal income tax added about $14,400 after her deductions, for a total near $34,500. Nothing had been withheld, and she'd made no quarterly estimated payments, so an underpayment penalty came on top. Paying it left $11,500 in the business account heading into spring.
When a salary actually saves money
Marcus walked her through the alternative. An LLC can elect S corporation tax treatment by filing Form 2553. Imani would become an employee of her own company, paid a W-2 salary through payroll with taxes withheld. Payroll taxes apply only to that salary. Profit above it can go out as shareholder distributions with no Social Security or Medicare tax.
The catch is reasonable compensation. The IRS expects a salary close to what the business would pay someone else to do the owner's job. Marcus benchmarked a senior UX designer in Pittsburgh at about $95,000. Payroll software and a separate 1120-S return would add roughly $3,000 a year.
| Net profit |
Draws: self-employment tax |
S Corp: payroll tax on $95,000 |
Saving after $3,000 in costs |
| $142,000 |
$20,064 |
$14,535 |
$2,529 |
| $180,000 |
$25,433 |
$14,535 |
$7,898 |
Payroll tax = Salary × 15.3%
$95,000 × 0.153 = $14,535
At last year's profit, the election barely paid for itself. At the $180,000 Imani projected for 2026, it saved close to $7,900. The figures cover federal payroll taxes only, before income tax and state effects, and they're the reason Marcus ran both rows before recommending anything.
Setting the salary low to push more money into distributions is the obvious temptation. An IRS examiner can reclassify those distributions as wages, with back payroll tax, penalties, and interest. A salary you can defend with a job benchmark protects the whole arrangement.
What changes on the books
The salary becomes 6010 Officer wages, an expense on the P&L, along with the employer's share of payroll tax. Distributions go to 3200 Shareholder distributions, an equity account like the old draws. The P&L now shows what running the studio really costs, including a market-rate designer, which makes her margins comparable to other agencies.
How much to take out
The draw method hid one more problem. Imani set $8,000 a month because it matched her old agency salary, and the number never moved when revenue did. In March and August, two clients paid late, and her draws pulled the business account below $5,000 both times. A contract designer's invoice sat unpaid for three weeks in August.
Marcus gave her a ceiling for anything taken beyond her salary.
Available to distribute = Net profit after salary - Tax set-aside - Reserve top-up
In a $15,000 profit month, with 30% set aside for tax and $1,500 added to a reserve covering two months of fixed costs, she can take $9,000. In a $6,000 month, she takes $2,700, and her salary still arrives on schedule.
The rule both methods share
Payroll withholding only covers the salary. Distributions and any profit left in the business still carry income tax, so quarterly estimates stay on the calendar (April 15, June 15, September 15, and January 15).
Imani now moves 30% of each month's net profit into a separate tax savings account on the day her books close. She takes distributions only after that transfer and only from profit the close has confirmed.
Where Imani landed
She filed Form 2553 before the March 16 deadline, making the election effective for 2026. Payroll pays her $7,917 gross each month, and distributions go out quarterly. The 2025 bill came out of the business account, and her first 2026 estimate went out on April 15.
The old $8,000 on the first of the month looked exactly like a paycheck. Her tax return treated it as a draw against $142,000 of profit, and her books needed to show that from the first transfer.
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