Discussion Archives:LLC/Sole Proprietor Draws

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Consumer Questions --> LLC/Sole Proprietor Draws

Isovegas (talk|edits) said:

22 November 2005
I have a single member LLC that I file as a sole proprietor. I use Quickbooks 2000, and use one of their traditional templates for service industries.

I currently pay myself under an equity account for owner's draw. I pay the self employment tax based on the llc's profits on my schedule c.

My question is, do I have to charge payroll taxes to myself in addition to the self employment tax? I do not have a FEIN, as I am not required to have one according to the IRS.

Also, is an equity account the correct field?

Finally, are owner's draws limited to paid in capital that meet or exceed the amount of my owner's draw?

I have read many conflicting posts on this subject, and would greatly appreciate information from anyone who is crystal clear on this subject.


BCG CPA (talk|edits) said:

22 November 2005
No, you do not charge yourself payroll tax on your draws. Form 1040, Schedule SE calculates your self-employment tax based on your net profit. You do not need an FEIN unless you hire other employees.

Yes, draws are recorded to an equity account. For LLC's/sole proprietors, typically the equity account is renamed Capital. Profits (net income for the year) carry a negative balance, i.e., a credit balance. Draws are accounted for under the Capital section of the Balance Sheet and carry a positive balance, i.e., a debit balance. Later versions of QuickBooks closes the Drawings account to Capital automatically. I'm not sure for QB 2000. If not, then close the Drawings account into the Capital account on December 31st via a General Journal entry.

Typically, your annual Drawings balance will not exceed that year's net profits. Unless you contributed owner's capital for the year thereby increasing cash flow in the bank account and allowing for Drawings in excess of net profits.

Isovegas (talk|edits) said:

22 November 2005
On my older version of Quickbooks, my (Equity) owners capital draw account shows as a negative $52,165, while the Net profit shows as a positive $45,441. The difference may be explained by not properly reimbursing expenses that were paid in personally.

What am I doing wrong here? Shouldn't equity draws (money paid to me) show as money taken from the LLC, and thus, a negative number, while net profits carry a positive number?

Thanks for your input.

BCG CPA (talk|edits) said:

22 November 2005
It really depends on how the software handles it. The Equity section on QB's Balance Sheet may indeed carry the Drawings account as a negative balance. And your net profits as a positive balance. This is fine; not a problem. Different accounting software reports the numbers differently; some show negatives whereas others show positives. Just know yourself which direxction the numbers should be going. Drawings are Debit entries. Profits are Credit entries. This is the theory behind double-entry accounting.

Your Drawings balance won't necessarily have to equal your net profits balance at year-end.

Close your Drawings account balance into Capital (or Retained Earnings) on December 31st and everything will be fine starting off for 2006. Yes, the Capital (or Retained Earnings) account may then show a negative number, but that's perfectly okay. This account is just an accumulation of all net profits/losses/capital invested/draws taken over the prior years.

DianeOffutt (talk|edits) said:

22 November 2005
QuickBooks is geared for the typical business person rather than the accountant. Everything on the Balance Sheet and Income Statments show as "Positive" numbers. In the event some number is showing up as a "negative" than that means it is going against what the norm is, i.e., net income ($1,000) would mean in QUICKBOOKS lanquage a Loss. We, accountants KNOW the net profit really is a "credit", so it can be a bit frustrating to us. However, the end-user, small business client absolutely love the software due to the softwares intuitive design.
Personal tools