Owner's Draw: How to Record It in QuickBooks and the Books

What is an owner's draw, and is it a business expense?

An owner's draw is money or property an owner takes out of the business for personal use. It is not a business expense: it is the owner taking profit, so it lowers the owner's equity and never touches the profit and loss. To record one, post each personal-use withdrawal into an equity account named "Owner's draw", never to an expense account. Publication 334 describes a drawing account as a separate account for business income withdrawn to pay personal and family expenses, also called a withdrawals account or personal account. It also says a sole proprietor cannot deduct their own salary or personal withdrawals.

A draw can be property, not only cash. Merchandise taken for personal use comes out of purchases and is charged to the drawing account (Publication 334).

This page covers sole proprietors and owners of LLCs taxed as sole proprietorships or partnerships, whose draws follow the same rule. A corporation, including an LLC taxed as a corporation, records distributions and wages, not draws. For an S corporation (Form 1120-S), payments to an officer are wages to the extent they are reasonable pay for services; see recording S corporation distributions. For a C corporation (Form 1120), see C corporation owner dividends. A Form 1120-S or Form 1120 on your last return means you are in this group.

A case is not simple when:

• draws were already coded to expenses, wages or payroll
• the year is filed
• owner's equity is negative or does not tie to the return
• the LLC has more than one member

Gather first: bank statements for the whole year, the chart of accounts, last year's return, the entity type, and the operating agreement for an LLC with two or more members.

Why do withdrawals to my personal account show up as expenses, and how do I stop it?

A withdrawal shows up as an expense because the other side of the bank entry was posted to an expense account. Every transfer out of the bank needs an account on the other side. When an unmatched transfer to a personal account is accepted into a category that looks close enough, profit falls by that amount.

To stop it:

1. Create the draw account under equity (see "How do I record an owner's draw, and in which account?").
2. In the bank feed, record each personal-use transfer to the owner as a transfer to the draw account, never as an expense. Repaying a genuine member loan is a different entry; see owner contribution or loan.
3. Keep owner pay out of payroll. A sole proprietor is not an employee of the business.
4. Pay personal bills from a personal account. Publication 583 says to use the business account for business only and to write checks payable to yourself only for withdrawals for personal use. A personal bill paid from the business account is a draw too; see personal expenses paid from the business account.
5. Treat your own tax payments the same way. Federal income tax is not a business deduction, and one-half of self-employment tax is deducted on the personal return, not as a business expense. An estimated payment sent from the business account is a draw.
6. Look at the profit and loss each month. No draws should appear on it. Guaranteed payments and other genuine business payments to members need their own classification; see guaranteed payments versus partner draws.

How do I record an owner's draw, and in which account?

A draw belongs in an equity account, never in an income or expense account. Name it "Owner's draw" or "Owner's withdrawals". Menus and account types differ by software, so choose the equity type when you create it. An expense type would put it back on the profit and loss.

A multi-member LLC should keep one draw account for each member, under that member's capital, because the partnership reports each partner's distributions separately. Setting up all the equity accounts is in LLC equity accounts.

How does a draw differ for a sole proprietor, a single-member LLC and a multi-member LLC?

A sole proprietor and a single-member LLC owner have one draw account and no line for it on the return. Each member of a multi-member LLC has a draw account that ties to the K-1. The IRS treats a single-member LLC as part of the owner's return unless it elects to be taxed as a corporation, and an LLC with two or more members as a partnership unless it so elects. A husband and wife who own an LLC together as community property may treat it as either, and the IRS accepts either position, so confirm which one your return uses.

For members, the K-1 instructions treat advances or drawings against a share as current distributions made on the last day of the partnership's tax year. The Form 1065 instructions have each member's capital account show withdrawals and distributions apart from income.

A payment to a member for work or for use of capital, set without regard to the LLC's income, is a guaranteed payment, which the LLC generally deducts (Publication 541). A regular fixed withdrawal against the member's profit share can still be a draw; see guaranteed payments versus partner draws.

Does a draw lower my taxable profit or get reported on my return?

A draw does not lower taxable profit. Tax follows net profit, whether or not it is drawn. Publication 334 figures net profit by subtracting business expenses from business income and carries it to the owner's return. A sole proprietor or single-member LLC owner pays self-employment tax on net earnings from self-employment at 15.3%, figured on Schedule SE, with the Social Security part limited to an annual wage base (IRS).

A member of a multi-member LLC may be liable for tax on their share of the LLC's income whether or not it is distributed. That share may also be subject to self-employment tax (K-1 box 14). The draw reaches the member's return only as a K-1 distribution, which is generally not income unless it exceeds basis (see "What if I draw more than the business earned?").

Do I owe estimated tax when I take draws?

Draws are not wages and generally have no payroll withholding, so owners pay estimated tax on their expected tax bill, not on the cash they draw. Publication 505 says estimated tax covers income not subject to withholding, including self-employment income, and covers self-employment tax as well as income tax.

You generally must pay estimated tax if you expect to owe at least $1,000 after withholding and credits, and your withholding and credits will not cover enough of this year's or last year's tax. A draw is not a tax payment. The safe-harbor tests, amounts and dates are in quarterly estimated tax payments. A partnership with a foreign partner may have to withhold on that partner's share of US business income even when it distributes no cash (IRS); see foreign partner withholding.

How do I fix draws I already booked as expenses?

Reclassify each one to the draw account, then check the corrected profit against any return already filed.

1. List the suspects: transfers to the owner's accounts, checks payable to the owner, personal bills, estimated tax payments, and anything in wages, payroll, miscellaneous or owner-pay categories.
2. Match each to the statement and its purpose. Only personal-use payments are draws. Member-loan repayments, reimbursements of business costs the member paid, and guaranteed payments are different entries that keep their underlying expense or payable. A vendor payment coded to the wrong expense is a different fix.
3. Set aside owner health insurance and retirement contributions. A sole proprietor's own health insurance premiums and own retirement plan contributions are not Schedule C expenses; they may be deductible on Schedule 1 of Form 1040 instead (Schedule C instructions). If they were deducted on Schedule C, moving them to the draw account raises profit, so check whether the personal deduction was claimed.
4. If you ran payroll for yourself, payroll tax returns and a Form W-2 may already have been filed. Changing the books does not change them; have a preparer review those filings first.
5. Move the draws to the draw account. Profit rises by the total.
6. If the year is filed, compare corrected profit with the return. Higher profit can mean the return understated income tax and self-employment tax.

A sole proprietor or single-member LLC owner corrects a filed Form 1040 with Form 1040-X, one for each year. Interest is charged on tax not paid by its original due date, and a late-payment penalty can apply to additional tax not paid after the IRS asks for it; other penalties may apply. Filing before the IRS contacts you generally avoids the 20% accuracy-related penalty (26 CFR 1.6664-2).

A partnership is under the centralized audit regime unless it elected out on a timely filed return (Schedule B-2 shows this). One that did elect out files an amended Form 1065 and amended K-1s for each affected partner, per the Form 1065 instructions. One that did not generally files an administrative adjustment request (AAR) instead of an amended return and amended K-1s. Only the reviewed year's partnership representative or designated individual can sign it, generally within 3 years after the later of the return's filing date or unextended due date and before any Notice of Administrative Proceeding (IRS). Past either limit, have a preparer check the route.

Several filed years, a partnership return, or an IRS notice are cases for a preparer to review before any entry or amendment is made. A change to a federal return may also affect the state return; contact your state tax agency.

Changing entries in a filed year also moves opening balances; see closing date after taxes are filed. The amendment steps, and how many years back the IRS can generally assess added tax, are in amending a return for business expense mistakes.

What happens to the draw account at year-end?

Most books close the draw account into equity at year-end, so it starts the new year at zero. For a sole proprietor or single-member LLC, the year's draws and profit go into owner's equity. For a multi-member LLC, each member's draws go into that member's capital account.

Ending equity is the same whether or not you close the draw account: opening equity, plus money put in, plus net profit, minus draws. The closing entry is a bookkeeping step, not a tax filing. For a partnership, each member's cash draws should agree with the cash distributions in K-1 box 19. Box 19 can also include property and deemed distributions from a drop in the member's share of partnership debt, which are not bank draws (K-1 instructions).

What if I draw more than the business earned?

A draw above profit is not an expense or a loss. A sole proprietor or single-member LLC owner is taxed on net profit as before, and the extra draw lowers owner's equity, possibly below zero; see negative owner's equity.

For a member of a multi-member LLC, cash distributed above the adjusted basis of the member's interest is treated as gain from a sale or exchange of the interest. The capital account on the K-1 can't be used to figure basis; see partner capital accounts.

Example

These examples are illustrative, in US dollars.

Sole proprietor

A business earns a profit of US$90,000 and its owner transfers US$60,000 to her personal account over the year. The books show profit of US$90,000 and a US$60,000 draw reducing equity. She reports net profit of US$90,000 on Schedule C, not US$30,000, and self-employment tax is figured from that profit, not from the draw.

A bank feed coded to an expense

A US$2,000 "Transfer to checking" was accepted into Office Expenses every month of a filed year. The books and the return show profit of US$50,000. If every one of those transfers was a draw, the profit is US$74,000, because US$24,000 of draws was deducted. Reclassifying the US$24,000 to the draw account fixes the books. The filed return would then likely need a correction that adds US$24,000 of profit, with the added income tax and self-employment tax, interest from the original due date and possibly penalties.

Two-member LLC

Each member draws US$3,000 a month into their own draw account, US$36,000 a year each. The LLC earns US$120,000, the agreement splits profit equally, there are no guaranteed payments, and each member has enough basis for the distribution. Each member is taxed on US$60,000 whether or not it was drawn. Each K-1 shows US$36,000 in distributions, and neither amount is an expense. Each capital account rises by US$24,000 net.

Different for you?

• Draws were booked as expenses in a year that is already filed, payroll was run for yourself, owner's equity is negative or will not tie to the return, or a lender or preparer needs clean statements: the fix changes the books, may change a filed return, and decides how the accounts are set up from here. Start with bookkeeping help, the bookkeeping cleanup checklist and amending a return for business expense mistakes.
• Your business is a corporation, or an LLC taxed as a corporation: for an S corporation, see recording S corporation distributions; for a C corporation, see C corporation owner dividends.
• Your LLC changed its tax class during the year (a second member joined, or it elected corporate or S status): the draw rules change from the effective date, so the books need a cut-off there. An S election (Form 2553) generally must be filed within 2 months and 15 days after the start of the year it takes effect (IRS). Start with bookkeeping help.
• You or a member live outside the US: a foreign-owned single-member LLC may report owner draws on Form 5472; see paying yourself as a foreign owner and foreign partner withholding.
• You and your spouse own the LLC together in a community property state: the IRS accepts either sole proprietor or partnership treatment, so confirm which return you file before you set up draw accounts; see LLC equity accounts and bookkeeping help.
• Equity is negative after draws, or members' accounts do not tie to the K-1s: see negative owner's equity and partner capital accounts.
• Your LLC promises a member pay for work or capital without regard to profit: see guaranteed payments versus partner draws.
• Personal bills are paid straight from the business account: see personal expenses paid from the business account.
• You put your own money in: see owner contribution or loan.
• You want to know how to pay yourself: see paying yourself from an LLC.