This article is for admins who want to classify an employee as an owner and pay them owner’s draws.
An owner’s draw is a tax-free transfer of money from the company to an owner. No taxes are assessed or paid on this money. The IRS does not require payroll tax filing or deposits for owner’s draws. Instead, the owner reports these payments on their individual tax returns each year.
What to know about owner’s draws
Owners of Sole Proprietorships, Partnerships, and Limited Liability Companies (LLCs) typically use this type of payment.
Your company must use one of these business (entity) types in Gusto to set up owner’s draws.
In Gusto, owners cannot receive both a taxable salary and a non-taxed owner’s draw.
If an owner also works as a W-2 employee, you need to handle their owner’s draws (and any related tax forms) outside of Gusto.
If you previously set up an owner to receive owner’s draws but now need to report W-2 wages instead, you can find the next steps in this article.
Discuss questions about the personal tax implications of taking owner’s draws (versus paying W-2 wages) with a licensed tax advisor.
Expand the sections to learn how to set up or pay an owner in Gusto so they can receive owner’s draws.
Follow the instructions that match your owner’s situation.
We cannot set up an owner to receive both a taxable salary and a non-taxed owner’s draw. If an owner works as 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 needs to handle the taxes, deposits, and filings related to their owner’s draw distributions. We do not complete Schedule K-1s, but here are instructions on how to fill out Schedule K-1.
Owners who have benefits with Gusto must set up an employee account to participate in the company’s benefits package. The owner needs this account to access benefits information and participate in annual open enrollment through their Gusto account.
Note: If the owner does not plan to participate 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, so the company pays the full premium.
To set up a new employee with an owner’s draw:
Go to People.
In the top right, click Add person.
In Step 1: Basics, enter employee details.
For Worker type, select Employee.
Click Save and continue.
In Step 2: Role, enter details about the employee’s role.
Click Save and continue.
In Step 3: Compensation, enter details about the employee’s compensation.
For Employee type, select Owner’s draw.
Note: The company must be set up as a Sole Proprietorship, Partnership, or LLC in Gusto to set up owner’s draws. If your entity type is incorrect, learn how to change your entity type.
For Amount, add a default amount the owner will withdraw per payroll, if applicable.
Click Save and continue.
Review the information and click Save and continue to next task.
Continue with onboarding.
On the Tax Details page, you may be asked to make a selection for withholdings, but this is just a placeholder, as taxes will not be withheld on the owner’s draw.
Your business entity type determines your next steps:
For S-Corps: If you need to classify an existing employee as a 2% shareholder for an earlier part of the calendar year, follow the steps in our article on updating a shareholder’s status.
Note: Your company must be taxed as an S-Corp in Gusto to assign 2% shareholders.
For Sole Props, Partners, and LLCs ( taxed as S-Corps): If you need to set up an existing employee to get owner’s draws, follow the steps below.
To set up an existing employee as a new owner or 2% shareholder:
Go to People.
Find the employee and click their name to open their profile.
Under Information, click Pay.
Next to Compensation, click Edit.
For Employee Type, select Owner’s draw.
Your company must be set up as a Sole Proprietorship, Partnership, or LLC in Gusto to set up owner’s draws.
For Wage amount, enter the default payment the owner will withdraw per payroll, if applicable.
Select the Effective pay period for the new compensation.
Enter a Reason for change to note why you made this update.
Click Save.
The owner’s draw will appear on regular payrolls. You can process it with the rest of your employees’ payments.
You can pay owner’s draws during your regular payroll runs in Gusto.
We cannot set up an owner to receive both a taxable salary and a non-taxed owner’s draw. If an owner works as 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 needs to handle the taxes, deposits, and filings related to their owner’s draw distributions.
To make an owner’s draw during regular payroll runs:
Go to Pay.
Click Run next to the payroll.
Next to the owner, view their default owner’s draw amount or click in the Owner’s Draw column to enter a new dollar amount.
Click Review summary.
Click Submit payroll.
Owner’s draws are not subject to payroll tax withholding, tax filings, or tax deposits. Instead, the owner pays taxes on this money 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), reach out to a licensed tax advisor. If you need help finding one, check out our Partner Directory.
Read 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 you set them up in Gusto.