Classify an employee as an owner and pay them owner's draws

For owners who take owner's draws and have a taxable salary

We do not have the ability to set up an owner to receive both a taxable salary and a non-taxed owner's draw. If you have an owner who is a W-2 employee, we recommend:

• Paying the owner their salary using Gusto, and then;
• Handling the owner's draws outside of Gusto.

The owner will need to handle the taxes, deposits, and filings related to the owner's draw distributions. Gusto does not complete Schedule K-1s for you, but you can get instructions for how to fill out Schedule K-1 on our blog.

For owners who have benefits with Gusto

Owners who have benefits with Gusto must set up an employee account so they can participate in the company's benefits package. This setup is required so that the owner can access benefits information and participate in annual open enrollment through their Gusto account. 

• Note: If the owner does not plan on participating in benefits, they do not need to complete this step.

If the owner pays themselves using an owner's draw, no deduction will appear on the paystub—owner's draws are pretax, and the company is paying the full premium.  

Set a new employee up with an owner's draw

1. Click the People section and select Team members.
2. Click Add a team member.
3. For “Team Member type”, select Employee. 
4. For “Employee Type”, select Owner's Draw.
   • Reminder: The company must be set up as a Sole Proprietorship, Partnership, or LLC in Gusto to set up owner's draws. If your business type was previously set up wrong, you can change your entity type. 
5. For Amount, add a default payment that the owner will withdraw per payroll, if applicable.
6. On the “Tax Details” page you'll be required to make a selection for withholdings, but this is just a placeholder as taxes will not be withheld on the Owner's Draw.
7. Click Save and Continue.

Set up an existing employee as a new owner or 2% shareholder

Based on your business type, next steps may differ:

• For S-Corps—if an existing employee should've been classified as a 2% shareholder during an earlier part of a calendar year, follow the steps in our article on updating a shareholder's status.
  • Reminder: The company must be set up as an S-Corp in Gusto to assign 2% shareholders.
• For Sole Props, Partners, and LLCs (that are taxed as S-Corps)—if an existing employee should've been set up to be paid with an owner's draw, follow the steps below.

Here's what to do:

1. Go to People and select Team members.
2. Find the employee and click their name to open their profile. 
3. Under “Information” click Pay. 
4. Find “Compensation” and click Edit. 
5. For "Employee Type", select Owner's Draw.
   • The company must be set up as a Sole Proprietorship, Partnership, or LLC in Gusto to set up owner's draws.
6. For "Amount", add a default payment that the owner will withdraw per payroll, if applicable.
7. Select the Effective pay period for the new compensation.
8. Enter a Reason for change to note why this update is being made.
9. Click Save.

The owner's draw will appear on regular payrolls and can be processed with the rest of your employees' payments.

For owners who take owner's draws and have a taxable salary

We do not have the ability to set up an owner to receive both a taxable salary and a non-taxed owner's draw. If you have an owner who is a W-2 employee, we recommend:

• Paying the owner their salary using Gusto, and then;
• Handling the owner's draws outside of Gusto.

The owner will need to handle the taxes, deposits, and filings related to the owner's draw distributions. 

Make an owner's draw during regular payroll runs

1. Click the Pay section and select Run payroll.
2. Click Run Regular Payroll.
3. Next to the owner, view their default owner's draw amount or click Owner's Draw (OD) to enter a new dollar amount.
4. Finish running payroll.

These wages are not subject to payroll tax withholding, tax filings or tax deposits. Instead, the owner is taxed at the end of the year on their personal or business income tax returns.

If you have questions about the personal tax implications of owner's draws (versus payroll tax implications on salary wages), we recommend reaching out to a licensed tax advisor. If you need help finding one, check out our Partner Directory.

Head to our tax exemptions article to learn how to set up exemptions (for individuals or the company). Confirm all exemptions with the relevant tax agencies or a tax professional before setting them up in Gusto.