Are Owner’s Draws Taxable for Small Ecommerce Businesses?

An owner's draw is a withdrawal of assets from the business for personal use. Assets can be in the form of cash, furniture, fixtures, or inventory. Most often, owners take draws in the form of cash, either as a salary or as a return on their investment.

A business's structure determines whether the owner(s) can take draws. Owners of sole proprietorships, partnerships, and limited liability companies (LLCs) can take owner's draws, whereas owners of s-corps and corporations cannot take an owner's draw.

Owner's draws are not separately taxable for the business or the individual. The withdrawal of assets is merely a transfer from the business to the owner.

How Owner’s Draws Affect Taxes

The amount a small business owner withdraws from their business does not affect their taxes due. Instead, taxes are calculated based on the profit or net income of the business. Sole proprietorships, partnerships, and LLCs are considered pass-through entities—essentially, the profits reported by the business entity are passed through to the individual(s) who own(s) the business. The business owner then reports their share of profit on their individual tax return.

The amount of profit reported is determined by subtracting expenses from income. An owner's draw is not considered income or an expense for the business, so it does not increase or decrease the profits reported. Since an owner's draw does not change the business's net income, it doesn't affect the amount of taxes owed.

A small ecommerce business owner may be subject to self-employment tax and/or be required to pay estimated taxes, depending on their specific tax situation. It is always advisable to contact your tax professional to determine what taxes you may be required to pay.