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Question: June is a sole proprietor who reports her activity on a Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Throughout the year, she took an owner’s draw from the business. Can she deduct an owner’s draw from a business checking account for her personal use? Secondly, must separate payroll taxes be paid on these withdrawals?

Answer: No. For federal tax purposes, a sole proprietor cannot deduct their own salary, or any personal withdrawals made from their own business. This is because a sole proprietor is not an employee of the business (Publication 334, Chapter 8, Page 33).

While accounting for an owner’s draw may be important for bookkeeping purposes, it is an equity transaction on the business’s balance sheet, which means there is no current income tax impact for an owner taking distributions from their sole proprietorship. For example, there is no line on a Schedule C for an owner’s draw. It is not regarded as a business expense for income tax purposes. Sole proprietors report net income from their business activity without consideration for any funds withdrawn by them, nor are these withdrawals subject to income tax or self-employment tax.

Planning tip: Owners of sole proprietorships are also not eligible to be treated as employees and may not receive salary or wages from the unincorporated business. Additionally, it’s important to account for when business owners may be forced to make capital contributions back into their business if they are in the habit of withdrawing much of the available cash. These contributions are not considered income to the business, much like the owner making withdrawals is not a deduction to the business.